Should you buy these three AIM IPOs?

New AIM entrants have been few and far between in the first couple of months of this year, but that is beginning to change, with an impressive range of businesses wanting to join the junior market.

There were only six new AIM entrants, including three reversals, in the first two months of 2016. March is already set to surpass that figure, with a number of companies - such as robotic process software developer Blue Prism - already joining and more to come, both later in the month and in subsequent weeks.

March was historically a good month for new admissions, but this has not been as true in recent years. Many companies have a calendar financial year and can bring out their full-year results at the same time as the flotation, thereby giving potential investors up-to-date information.

Back in March 2005, there were 69 new admissions, admittedly out of 519 for the year. Last year, seven out of the 61 new entrants joined in March, but in recent years March flotations have been thin on the ground.

The forthcoming businesses joining AIM operate in a range of sectors, including retail, technology, utilities. financials, construction and packaging.

They are generally UK and Europe-based, although there are also two US-based pharma-focused businesses. Evofem Holdings Inc, which is developing contraceptive products, is set to join AIM on 22 March, and its main shareholders are Invesco and Woodford. MaxCyte Inc, which provides technology and services for the research and development of cell-based medicines, is due to float on 29 March at a valuation of £30.4 million.

There is a number of solid companies with reasonable track records. Of course, there is no guarantee that they will all end up joining AIM and some are further into the process than others.

As ever, the valuations placed on these companies will be important and full information is not available as yet prior to the prospectuses being made public. However, the accounts of the larger UK-registered businesses are available on the Companies House website and these can provide additional details of the finances of the business.

The holding companies can be set up just before flotation, but the underlying subsidiaries will have their accounts available. The smaller companies that float may not have to publish full accounts, so it is more difficult to assess what has been happening, although there can be useful information in the abridged accounts.

Here are three of the potential new AIM companies.

Hotel Chocolat

Chocolate manufacturer and retailer Hotel Chocolat has grabbed the headlines in recent days because of its proposed move to AIM in the coming weeks.

The problem with these high profile flotations of well-known brands is that they tend to get a higher valuation because investors are attracted by the brand. It is probably no accident that the process is starting after a strong first half's trading and prior to Easter, when Easter Eggs are on people's minds. The flotation is expected during the second quarter.

The final valuation of the business has not been announced, but £150 million is suggested. A placing valued at £50 million is expected, but most of that relates to existing shares and the new money being raised is £10 million.

That means that the existing business, which made an operating profit of £3.54 million in its most recent financial year - having lost money the previous year due to the start-up costs of cafes and restaurants - is being valued at £140 million. Net debt was around £14 million at the end of June 2015. That includes £6.9 million of chocolate bonds, which pay their interest in chocolate rather than cash, repayable in June 2017.  

Ferrero paid £112 million for Thorntons last year and its net debt was £30.8 million in January 2015. There was a pension deficit of more than £30 million to take into account as well. However, Thorntons' underlying operating profit was £10 million in its last full financial year as a quoted company. There was a dip in profit in the following six months, but on a rolling 12-month basis the operating profit would still be £9.6 million.

It can be argued that Hotel Chocolat has much better prospects and Thorntons consistently disappointed investors.  Even allowing for this, the proposed rating for Hotel Chocolat appears a full one, especially as its own track record does not show smooth growth.

International expansion of Hotel Chocolat has been disappointing. There are three shops in Denmark, but a foray into the US was closed down in 2014. The US lost £2.34 million on revenues of £2.12 million in the year to June 2014, having lost £1.8 million in the previous year. A pilot store in Netherlands was also closed the previous year, while an attempt to roll out a business-wide enterprise resource planning IT system was stopped.

Hotel Chocolat is certainly a successful UK business but, like many other companies, it has found it difficult to expand overseas. The UK operations are continuing to grow, though, and manufacturing capacity will be increased. Don't chase up the share price when trading begins.

Watkin Jones

The underlying Watkin Jones construction business is more than 200 years old but, since 1999, its main focus has become the building of student accommodation.

Student numbers are set to continue to increase in the UK, but the provision of accommodation is not increasing as quickly. This academic year student rooms have increased from 535,000 to 545,000, but the ratio of students to available rooms is expected to rise from 3.1 to 3.2 times.

The supply of accommodation varies enormously from city to city with particularly large shortages in London, Edinburgh, Manchester, Cardiff and Oxford. Investment in the sector increased significantly last year and a number of student accommodation-focused funds were set up.

Watkin Jones has built 88 sites that include more than 28,000 beds and it has 31 developments in the pipeline covering 11,300 beds due to be completed by 2018. This makes it one of the largest developers of student accommodation. The company procures sites, obtains planning permission, helps obtain funding, constructs the property and offers asset management services through Fresh, which manages 8,300 beds. This figure is set to increase to more than 20,000 beds by September. 

Management plans to use these skills to move into the private rented sector, which is also growing. Private rental homes have moved ahead of social and local authority housing in terms of numbers and the main growth in housing is coming from this sector.

In the year to September 2015, revenues increased from £227.3 million to £244.2 million, while operating profit from continuing operations jumped from £15 million to £32.5 million.  

Watkin Jones is valued at £255 million at a placing price of 100p a share with £85.4 million of new money being raised. The Watkins Jones family is selling a total of £45.9 million worth of existing shares, although they will still own the majority of the shares.

Watkins Jones expects to offer a pro forma full year yield of 6%. This year's dividend, for the part of the year that the company is quoted, will be 4p a share.

The flotation is expected to happen on 23 March.

Petainer

PET container and sustainable packaging manufacturer Petainer was a £16 million buyout from Rexam back in November 2009 that was backed by Next Wave Partners and WHEB Ventures. Next Wave bought out its partner in 2014 for double its investment and, prior to the flotation, owns 88.2%, with chief executive Nigel Pritchard owning 5.5%.

Petainer supplies packaging for the food and drink sector from factories in the Czech Republic, Sweden and Russia and it has a loyal customer base. At the end of last year, a new manufacturing facility was opened in Mumbai. The sugar tax on the soft drinks makers could hit demand for PET containers, but Petainer does appear to have a good spread of customers in the beverages sector, including brewers and wine makers.

In 2014, according to the annual report of the core business Petainer made a €10.2 million (£7.9 million) pre-tax loss, due to interest costs and exceptional losses, on revenues of €102 million.

The financial structure is likely to change on flotation, with debt being paid down. Net debt was more than €43 million at the end of 2014 and there were also preference shares valued at €4.84 million. Earnings before interest, tax, depreciation and amortisation improved from €9.06 million to €12.5 million in 2014 and that provides a better indication of performance.

It is always sensible to be wary of a company where a venture capital firm is the main shareholder and they are selling a significant chunk of their shareholding. The fact that they believe it is time to cash in can be a warning.

Some companies, such as Manx Telecom, continue to do well, but there are also examples, such as parcel delivery group DX, where performance has gone downhill. It is unclear how much will be raised by Next Wave and how much will go to the company.

Petainer is expected to join AIM on 23 March.

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.