AIM's best IPOs of 2018

There was a slow start to the year when it comes to new entrants to AIM, but that has changed during June. There have been 14 new admissions, including two reverse takeovers, during the month including three on 29 June. There are a couple of new companies set to float on AIM in July, but the flow is likely to slow, partly due to the summer lull.

There were 20 admissions in the first five months of the year. Stripping out five reverse takeovers and Volex, which moved from the Main Market, there are 29 new entrants in the first half and 23 of them are trading above their flotation price.

In the first half of 2017, there were 18 new admissions, excluding two moves from the Main Market and eight readmissions. I have also excluded the recent readmission of Halosource Corp following a change of domicile.

There were only nine cancellations in June, so this is the first month this year where there have been more new joiners than leavers.

Of the six companies where the share price has fallen, four are resources companies. The two reverse takeovers of resources companies have also been followed by a decline in the share price. Oil and gas companies Serinus Energy and TransGlobe Energy Corp are the two resources flotations with higher share prices and the latter only floated on 29 June.

Last year's high flyers

That contrasts with the 2017 AIM admissions when there was a wider spread of performance by resources companies, specifically oil and gas producers, which provided some of the best performers. Bushveld Minerals Ltd also did well but that was a reverse takeover.

Touchstone Exploration Inc, the Trinidad-focused oil and gas producer, already had a listing in Toronto and the flotation in London helped to raise cash to invest in drilling wells to boost production and cash flow. That growing cash flow has helped the share price to more than double.

Eco (Atlantic) Oil & Gas Ltd is another strong performer from 2017 that also gained a secondary quotation on AIM to go with its Toronto quotation. Eco has interests in Guyana and Namibia but, in contrast to Touchstone, these assets are still at the exploration stage.

The best performer of the new oil and gas companies from 2017 is UK-focused i3 Energy. Having said that, by the end of 2017 the share price had declined but it has soared in recent months.

The focus is the development of the Liberator offshore field in the UK, and in May i3 was awarded the licence next door to its existing block. Management believes that the new acreage includes an extension of the Liberator field.

2018's big winners

There are some big winners among the 2018 entrants. GRC International Group floated on the back of the lead up to the GDPR legislation becoming effective, and this has boosted demand for the company's consultancy activities.

The share price has risen by 357% in fewer than four months. That means that GRC is valued at more than £180 million when even after its annual revenues doubled they were just over £15 million. Growth needs to be rapid to warrant that valuation.

VR Education share price has nearly doubled. The educational VR content developer does have revenues, but they are modest. There are link-ups with educational institutions and other partners that could yield longer-term benefits.

The Aquis Exchange share price has already risen by two-thirds after little more than two weeks on the market. Aquis has developed an equities trading venue where the price of a trade is transparent to the whole market before it is made rather than after a delay. The Warsaw Stock Exchange was an early backer, but it has sold its stake.

Source: interactive investor                           Past performance is not a guide to future performance

Latest trends on AIM

AIM has tended to be prone to fashions in the past, and what tends to happen is that some of the companies do well, but ones that come along on their coattails can be less successful.

There are some fashions showing through in the recent entrants. The first of these is lawyers taking on corporate structures and floating. In the past few weeks, Rosenblatt Group Ordinary Sharesand Knights Group have joined Gateley (Holdings), Gordon Dadds Group and Keystone Law Group Ordinary Shares on the junior market.

In some ways there is a similarity with the accountancy firm consolidators that joined AIM around 15 years ago. There is an idea that accountants and lawyers will always make money, but this is not necessarily true, and the performance of the accountancy consolidators shows this.

Tenon, which started out as a shell, made numerous acquisitions of accountancy firms but ran into trouble when it came to fully integrating them.

Fairpoint Group has shown that it can also be difficult to put together a legal business and integrate acquisitions. The former Debt Free Direct wanted to diversify away from IVA and debt management operations and acquired legal businesses to form the Simpson Millar legal business. Problems with cash flow and working capital levels meant that administrators were appointed to Fairpoint in August 2017.

Simpson Millar was involved in some cases where it took years to conclude the cases and receive payment. The make up of the work done by these legal firms will vary and some will be more exposed to high levels of working capital than others, which have a greater focus on work that generates cash payments within a few weeks. That should always be kept in mid when assessing the individual businesses.

The lawyers that have floated so far have either a long-term track record or can point to success in doing deals and consolidating firms. Knights is the latest and it intends to use the quotation to continue to expand via acquisition. Knights is a specialist in corporate and commercial law and it has seven offices in London. The strategy is to have more than nine offices by 2020.

It's kid's stuff

The other noticeable recent trend is for video games flotations. It may be cynical, but this appears to be on the back of the soaring share price of Frontier Developments in 2017. The share price rose by 373% last year and subsequently went higher, although it is back at around the level it was at the end of 2017.

Brokers and managements spot an opportunity when a particular sector/industry is attracting investors, especially if the ratings are high, and it will take a few months to find suitable candidates and bring them to the market.

There have been phases when video games companies have floated in the past and there was a mixed performance. The trouble with video games companies is that they can have one or two good years on the back of a very successful game, but it can difficult to follow these successes.

Video games companies Codemasters Group Holdingsand Team17 Group floated within a few days of each other. The companies themselves got a minority of the cash raised. Codemasters raised £15 million gross and existing shareholders sold shares worth £170 million. This valued Codemasters at £280 million. Team17 raised £45 million gross, while the selling shareholders raised £62.5 million. Team17 was valued at £217 million at the time but the valuation has increased to more than £300 million in fewer than six weeks.

Both companies are profitable. Even if you take the 2017 EBITDA figure of £12.9 million, Team17 is trading on a historic EBITDA multiple of 23. Even if the cash raised in the flotation is excluded from the calculation - after all there has been no benefit from that cash in the 2017 figures - the EBITDA multiple is just below 20.

Unsurprisingly, the company has floated on the back of a strong year, following an acquisition, when revenues and EBITDA both more than doubled. Management talks about its low risk model and it does generate more than 50% of its revenues from back catalogue games.

What to look for next

The latest fad could be virtual reality. EVR's soaring share price sparked the flotation of VR Education and next month it will be followed by Immotion.

Manchester-based Immotion provides virtual reality platforms and services and motion platforms. Immotion currently sells these platforms but it is moving into owning and operating VR motion platforms in shopping centres. There are two sites already up and running.

The issue price and valuation have not been set but Immotion expects to join AIM on 12 July. It will be interesting to see how the valuation is set given the high valuations for the other VR companies.

The other company that has confirmed it is joining AIM in July is Yellow Cake. It is set to float on 5 July, although it has yet to commence trading. The strategy is to provide investors with exposure to the uranium price by investing the majority of the £151 million raised at 200p a share in long-term holdings of uranium that will be stored in Canada. Less than 10% of the cash will be used for other activities, such as trading.

This is a very simple investment. It will be attractive if you believe the uranium price is going to rise significantly, and as long as the overheads are not taking too much of the cash.There will not necessarily be many more flotations over the summer, and the real test of whether the underlying momentum of new admissions is accelerating will be activity in October and November.

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.