Our verdict on four unloved AIM shares

There are AIM companies that are unloved and/or their share prices have taken a good kicking by investors. Some of them will not recover, while others may have a chance of becoming attractive investments in the future.

These four businesses could all recover, but there are still many hurdles and risks to negotiate before that happens.

Fairpoint

15.25p

Legal and debt services provider Fairpoint shocked the market with a profit warning just before Christmas and the chief executive left before the New Year. The dividend, which was a major attraction, will be suspended for the time being.

The legal services business has not been trading as well as hoped in November and December. The closure of the debt services business should be completed in early 2017, but overheads are higher than planned. The individual voluntary arrangement (IVA) business is generating cash as the older IVAs run their course.

Still a lot of uncertainty, but Fairpoint should eventually recover

The move away from debt management into legal services was a good strategy. There was no growth in the debt and IVA markets and the company built up a significant legal business via acquisition. Things had appeared to be going well with the original operations used to generate cash. However, the problem appears slightly more than a blip.

House broker Shore Capital cut its 2017 profit forecast by two-fifths following the profit warning, but that still equates to earnings per share of 7.9p - equivalent to a prospective multiple of two. That indicates a lack of faith by investors. Hargreave Hale does not seem confident in the business and it has been reducing its stake over the past month, although it is still nearly 10%.

Net debt of £18.7 million is estimated for the end of 2016 with available facilities of £25 million. Future deferred consideration payable for legal services acquisitions is likely to be lower than expected and cash should be generated from operations.

In some ways Fairpoint is the most attractive of the unloved companies because it has a proven, cash generative business. However, it is still early days and it is difficult to assess how bad things are in the legal services business and whether the debt can be serviced without a hefty share issue.

Verdict

Still a lot of uncertainty, so it may pay to wait for more information, but Fairpoint should eventually recover if it remains independent.

Vislink

17.75p

Vislink is an example of a company where new management comes in at a low level of the sector cycle and says it will improve performance and make it less cyclical. This is just like a newly appointed football team manager who says that the players are not fit enough and they will improve fitness - yet this is just what their predecessor said when appointed. The move into software was supposed to help offset the cyclicality, but it could not have a significant effect.

Management decided to dispose of the core broadcast and surveillance hardware business to xG Technology Inc - a former AIM company that makes Vislink appear a roaring success - for $16 million (£12.8 million). xG is an example of an unloved business that has managed to stay that way for a decade, having been introduced to AIM in November 2006 valued at £320 million.

The company reached a value of around £1 billion a few months later, but when xG left AIM it was valued at less than £30 million. This reflected the inability to generate revenues from its telecoms technology. The current market cap on NASDAQ is around $11 million but an additional $10 million has been raised to finance the deal.

The share price is already off the bottom and it's difficult to be confident in management

Executive chairman John Hawkins was appointed to the board on 1 April 2011, when the share price was 22.5p - higher than the current share price - and the recent fall to below 8p meant that the share price was lower than it had ever been under the previous management.

Net assets were £47 million at the end of June 2011, a figure that had more than halved to £22.9 million at the end of June 2016 even after additional share issues and it will fall further. The hardware business was in the books at £22.7 million, before central net liabilities, at the end of June 2016 - nearly £30 million lower than six months before thanks to losses and write-downs.

However, it turns out that Vislink is not getting the full disposal proceeds of $16 million upfront so it needs to hold a second general meeting to agree to the revised terms where only $6.5 million is payable initially. On completion, secured loan notes of $9.5 million will be issued and should be redeemed within 45 days of completion of the deal. Vislink also retains the right to cash received from an outstanding debt up to a maximum of $2 million.

Hopefully, this deal will go through now. Vislink would be left with a software business that has done reasonably well. However, the company will be small and needs a credible strategy.

The one thing on the side of Vislink is that Kestrel is building up its stake. That appears to be the major reason the share price has bounced back.

Verdict

Software business probably has a good chance to prosper, but the share price is already off the bottom and it is difficult to be confident in management.

The People's Operator

6.75p

Virtual mobile network operator The People's Operator floated at the end of 2014 at a hugely overblown price. Even if it had got anywhere near to its initial forecasts the valuation would have been a full one.

The presence of Jimmy Wales, the founder of Wikipedia, as a founder and director appeared to attract investor attention. Considering that Wikipedia is not a commercial organisation and it has to regularly ask people to donate money, this is not the greatest argument for backing a company.

The company should be given time to move into profit, if it can

The investor attitude towards the company, which enables users to nominate a charity to gain 10% of their mobile spend, has completely flipped and the share price has sunk due to disappointing growth in the UK and the US.

In November, £1.7 million was raised at 5p a share, with directors investing more than half, with a further £200,000 raised at the same price, more recently. That compares with a flotation price of 130p. Proposed non-executive chairman Michael Butler is buying £100,000 of shares and also, along with two other non-executive directors taking shares in lieu of fees. These recent share issues account for more than one-third of the enlarged share capital.

Although trading is broadly in line with current expectations, with revenues of £3.6 million back in early 2015 just after flotation, 2016 revenue of £98 million and a pre-tax profit of £17.1 million were forecast. This shows just how overoptimistic expectations were at that time.

There is a potentially good business here. The original forecasts show just how profitable the company could be and, if it manages to cover its overheads, then profit should grow relatively quickly.

Cost cutting should have reduced that breakeven level and unprofitable users are being shed. The directors are willing to continue to invest, which is important because this is a business that will need more cash.

Verdict

The backing of shareholders means that the company should be given time to move into profit - if it can is another thing.

CyanConnode

0.2p

CyanConnode has developed its technology over more than a decade, but it has failed to generate significant revenues on the back of the investment. That appears set to change.

Cyan Technology, as it was then known, was valued at £18.5 million at 22p a share when it joined AIM in December 2005. The market capitalisation is higher now, but that is due to share issues and the share price has slumped by more than 99%.

CyanConnode should thrive, although patience will be needed

CyanConnode has developed narrowband radio mesh networks technology that can be used when there is no reliable mobile signal. The focus on smart metering is finally paying off with a number of significant contracts gained in the past year via relationships with much larger partners.

It started supplying three contracts in India last year and this work is continuing into 2017, with the prospect of additional orders coming once the original contracts are completed. The orders have been in thousands, but there are millions of meters that need to be installed by 2019. A large contract in Iran will start to generate revenues this year and will continue to generate software licence revenues for a number of years. There are also other prospects in Asia.

The acquisition of Connode last year is helping the group to participate in the UK smart meter roll out, as well as adding technology.

There is cash of £3.9 million which should last for a while, but further funds may be needed. Share issues over the years mean that even at such a low share price, the company is still valued at more than £30 million, so there is still some way to go to show that it can justify a higher valuation.

Verdict

Still to demonstrate profitability, but order momentum is positive and the global market is enormous, so CyanConnode should thrive - although patience will be needed.

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.