DIY Investor Magazine
/
2015 Issue
37
Investors encouraged by the tax breaks given to AIM
companies now invest in profitable companies with
growth opportunities.
The AIM market theory is sound. A less regulated
market helps earlier stage companies raise
development funds to accelerate growth. This funding
of innovative start-ups in the early stages will never
easily translate into out-performance in a comparative
index.
New jobs, however have been created and new
technologies and better management practices have
been absorbed by the wider market.
AIM is a success for enterprises and capitalism, it
remains a battle ground for regulation and practice, so
the historic index performance does not tell the real
story of AIM.
The UK economy is growing at over 2%, CPI inflation
is a rounded 0%, and wages growth is 3.2% for the last
three months.
A near Goldilocks economy and although interest rates
may increase this year, small caps seem set to out-
perform. As the UK economy grows, smaller companies
are still finding it hard to raise expansion capital, and
we believe there is very attractive value in some smaller
companies.
Beaufort Capital Markets has raised £30m expansion
capital in the last quarter for around 14 companies,
ranging from; Proton Beam Therapy to Gold
exploration/production; from producing Graphene to
the development of e-commerce in Myanmar; from
smart meters to digital apps.
AIM will remain a breeding ground for higher risk
growth companies but increasingly as the index
matures it will be underpinned by fundamental value.
Beaufort believes that the UK small cap sector offers
good investment opportunities, for both value and out-
standing growth; few will make it to the FTSE 250.
The Beaufort Smaller AIM Companies EIS Fund offers
an opportunity to acquire stakes in ‘sound’ listed
companies with the potential for significant growth.
The main EIS (Enterprise Investment Scheme) tax
break allow investors, in qualifying companies, upfront
Income Tax relief as well as capital gains that are tax
free after three years and are Inheritance Tax free after
two years. This can allow up to 60p to be reclaimed
out of each 100p invested to a investor who can benefit
from all the tax breaks available. Investing in small caps
is, in my longer than I like to admit, experience partly
art and partly science, with an added dollop of good
memory.
We look for a hockey stick formation which is a
company with a high gross margin ((Turnover-Cost
of Sales)/Turnover x100) the higher the margin the
quicker the earnings fall though the ‘black-hole’ of
administration costs to value enhancing profits.
Next we look for earnings growing faster than
administration costs are rising. This is because once
past the break-even point a large proportion of the
incremental turnover feeds straight though to profits.
Companies with the highest gross margins are often
in services, technology and media sectors where, after
years of investing in development and needing frequent
fund raisings to cover losses that can cause the market
value to slip behind the real value of the opportunity,
the darkest hour really is just before the dawn.
Examples of companies with low capital intensity and
high gross margins such are; Sabien (LSE: SNT), whose
energy saving device has a new channel to market,
Newmark Technology (LSE: NWT), which recently won
a £2.5m four year contract with a large UK financial
institution and Forbidden Technology which has at
last launched its video Facebook. AIM does not need
to aim higher; it should remain a breeding ground for
higher risk growth companies but will increasingly be
underpinned by fundamental value. Our best tip is to
avoid AIM Index trackers, pick the shares yourself or
invest in a proactively managed fund.
About the author
Jon joined Beaufort in 2014 as a Corporate Broker. His experience of small
cap quoted companies stretches back many years- in a range of capacities;
Analyst/Head of Research (Teather & Greenwood, Insinger Townsley),
Journalist (Penny Share Focus ) EIS Fund Manager , Best Investment, t1ps and
Corporate Broking Director (Hoodless Brennan, Rivington St). He has deep
knowledge of the small cap sector and a pragmatic, proactive approach to
adding value to the investment proposition. Jon completed his MBA in 1992 at
Southbank University with ‘Filling the Small Companies Equity Gap’
