Interactive Investor

AIM IPOs - sorting the wheat from the chaff

17th September 2014 10:22

Andrew Hore from interactive investor

AIM admissions have already raised £2.16 billion so far this year, which is nearly double the amount raised in the whole of 2013. Even so, there have been concerns about the valuations of new issues earlier this year.

According to figures from Allenby Capital, by the end of August 33 of the 86 new AIM admissions had fallen in price. Much, it seems, is in the timing. Only four out of the bottom 20 performers floated after the end of April despite nearly three-fifths of this year's new admissions listing during that time. This suggests that valuations may have become more realistic as some companies that may have been hoping for high valuations have pulled out of their flotations.

There have, of course, been some big disappointments. One month after formalwear manufacturer Bagir joined AIM in April it warned that reductions in volumes would mean a much worse outcome for 2014 than originally envisaged. Some investors in the flotation, such as Hargreave Hale, have bought more shares since the warning, but Bagir is likely to be shunned until it can regain the confidence of the market.

The majority of new admissions, however - 48 out of 86 - are trading above their admission price. Allenby says that the median price increase of all the companies was 2.4% at the end of August.

There are AIM companies that appear too highly valued whether or not their share prices have risen or fallen since flotation, but there are others whose share price has fallen back since flotation that are still attractive investments. Next week I will pick out the ones to buy, but first I am highlighting those companies which appear fully-valued.

Haydale Graphene (HAYD)

Share price: 86.5p

Market cap: £9.8 million

Haydale is the third worst performer amongst the 2014 new admissions, having lost more than half of its value. Floated on the back of the hype about the potential for graphene, Haydale has very little to hold the share price up. It is always wise to be wary of businesses that float on the back of a sector bandwagon. They may have potential but could also be coming to the market way too early in order to grab the cash while it can. Haydale raised £6.6 million at 210p a share and the share price has always traded below that level. Former director and founder of the Haydale subsidiary Ian Walters took the opportunity to sell his 7.42% stake after trading commenced. Walters left the company in 2013 and he subsequently had disputes with management.

There are no published forecasts but this is a company that has generated revenue of less than £250,000 in 30 months, and in that time there was a cash outflow of more than £3.2 million. Haydale has developed a scalable plasma process to functionalise graphenes and other nano materials. Haydale is paying a retainer to New York-based InVentures, which will promote the technology to potential customers. Other marketing and distribution agreements have been made, but significant revenues still seem some way off.

RM2 International (RM2)

Share price: 74.5p

Market cap: £239.7 million

Pallets developer and manufacturer RM2 International raised £137.2 million at 88p a share when it joined AIM at the beginning of the year. Invesco owns 40% of RM2, but it obtained part of its stake at $0.01 a share and it appears that its average buying price could be less than 60p a share - still lower than the current share price. RM2 has developed the BLOCKPal, a multi-use pallet made of glass fibre and resin composite. The composite makes the pallet stronger and more durable. Yet only $5,000 (£3,000) was generated from this activity in 2013 and the rest of the revenues coming from a tracking business bought last autumn.

In June, RM2 said that its manufacturing facility would be up and running at the beginning of July and more potential customers are using the pallets. The cash in the bank may still underpin more than one-third of the market valuation, depending on the cash outflow this year, but it may take some time to break into the pallets market, particularly in North America where giant Brambles accounts for nearly half of the pallet rental market.

4d Pharma (dddd)

Share price: 385p

Market cap: £200.6 million

Pharma investment company 4d Pharma is the second-best performer of this year's flotations, and it has successfully issued shares at higher prices since the flotation. The company's focus is live-biotherapeutics, which use live, naturally occurring bacteria as the core ingredient of treatments. Investors have been attracted by the track record of management. Chairman David Norwood founded Intellectual property developer IP Group, while chief executive Duncan Peyton and chief scientific officer Alex Stevenson are both involved with Aquarius Equity, which provides finance for life science companies. These founders were issued 20 million shares at 0.25p a share prior to the flotation. The flotation raised £16.55 million at 100p a share, while a subsequent placing in June raised a further £21.5 million at 150p a share.

Also in June, shares were issued at 175p each to increase the company's stake in GT Biologics to 83.5%, while in July further shares were issued at 188.5p to part fund the acquisition of The Microbiota Company - a company that has not yet traded. 4d Pharma has made £2.08 million of loans available to GT and Microbiota. GT has gained Food and Drug Administration (FDA) orphan designation for paediatric ulcerative colitis treatment Rosburix, while paediatric Crohn’s disease treatment Thetanix and irritable bowel syndrome treatment Blautix are set to enter clinical studies to assess their safety. Even if any are successful, it will take years to obtain regulatory approval as treatments.

In recent days Invesco has increased its stake to 13% and Woodford Investment Management raised its stake to 12.1%. This buying suggests that they are confident that 4d Pharma can secure a much more significant acquisition. However, at a valuation of more than £200 million 4d Pharma is currently fully valued.

DJI Holdings (DJI)

Share price: 121.5p

Market cap: £158.6 million

DJI Holdings is an example of a valuation which reflects the size of the company's potential market rather than the present trading of the business. DJI supplies software to the lottery and gaming industry in China. It got off to a strong start as an AIM-quoted company and, although the share price has fallen back, it remains at a premium. DJI raised £9 million at 100p a share, which valued the company at £130 million, and a further £6 million from a convertible loan note issue. This cash is expected to last until DJI reaches breakeven.

Management says that there are significant barriers to entry in the Chinese lottery market and argues that the strong relationships that the company has developed put it in a strong position. DJI says that it has invested £30 million in developing the business. The Chinese lottery market is expected to grow from RMB261 billion in 2012 to RMB450 billion in 2015. DJI is loss-making and revenues were £1.12 million in 2013 and £641,000 in the first quarter of 2014. Management says that total revenues in May were 80% of the first quarter and there was a further sharp increase in June helped by the football World Cup.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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