Interactive Investor

AIM’s best sector in a bad year for junior market

14th April 2022 14:02

Andrew Hore from interactive investor

Property companies on the alternative index have shone as some normality resumes post-Covid, and our award-winning small companies writer says there’s plenty more to come.

AIM has been a poor performer over the past year, but there have nonetheless been many AIM companies that have done well during the period.

The best-performing AIM sector is real estate, which is 14.4% higher over the past 12 months (to 11 April). The sector has a 3.5% weighting in the FTSE AIM All-Share index, which fell by 14.6% over the year. So this represents significant outperformance in a tough period for AIM.

Just five of the 19 AIM sub-sectors are higher over one year, including financial services which has barely increased. Media is the next best-performing AIM sub-sector, with a gain of just under 10%.

The FTSE AIM Real Estate sector includes property investment companies and property services companies such as estate agents and lettings businesses.

Urban Logistics REIT (LSE:SHED) was included in the sector until it moved to the main market on 7 December last year. At the time of its move, it had risen by 16.3% since 11 April 2021, and over the full 12-month period it has increased by 30.2%. The initial 16.3% rise will have contributed to the outperformance of the real estate sector, particularly as Urban Logistics was one of the largest constituents before it moved.

There are 24 AIM companies that come within the Real Estate sector, but only 15 of these are included in the index. That tends to be because of liquidity issues and/or size. Two of the companies that are included in the AIM monthly statistics as part of the sector, Adams (LSE:ADA) and Pires Investments (LSE:PIRI), are really investment companies anyway.

Other companies you might have been expected to be in the sector are not included. First Property (LSE:FPO) owns property directly, but the main business is managing property funds, so it falls within the investment banking and brokerage services sub-sector of financials.

One thing that many of the real estate sector constituents have in common is a level of asset backing. They also tend to have an income stream. These things were not valued as highly back in 2020 and early 2021, when investors were keen on fuel cell and technology companies with little or no revenues and high losses. 

Dividends

The most noticeable thing about the better performers is they tend to be dividend-payers. There may have been some cutbacks in dividends during 2020, but they are generally back on a growth trajectory.

Dividend-payers make up more than 50% of sector constituents, probably double the percentage of dividend-payers in AIM as a whole. There are some attractive yields with the promise of steady dividend growth, combined in some cases with potential asset growth.

AIM property and property services companies' performance

Company

Ticker

Share price (p)

% change

Forecast yield %

Property Franchise Group (LSE:TPFG)

TPFG

368.5

+77.2

3.4

Lok'n Store (LSE:LOK)

LOK

£10.40

+74.8

1.6

Fletcher King (LSE:FLK)

FLK

52.5

+61.5

nil

Conygar Investment Co (LSE:CIC)

CIC

147.5

+31.7

nil

Belvoir Group (LSE:BLV)

BLV

272.5

+30.4

3.2

Secure Income REIT (LSE:SIR)

SIR

463.5

+25.4

3.7

Warehouse REIT (LSE:WHR)

WHR

169

+25.4

3.7

Panther Securities (LSE:PNS)

PNS

275

+22.2

2.2

Secure Property Development & Investment (LSE:SPDI)

SPDI

6.25

+19

nil

Real Estate Investors (LSE:RLE)

RLE

40

+12.7

8.2

Wynnstay Properties (LSE:WSP)

WSP

670

+12.6

3.2

Circle Property (LSE:CRC)

CRC

235

+10.8

2.9

M Winkworth (LSE:WINK)

WINK

180

+10.8

5.2

Caledonian Trust (LSE:CNN)

CNN

135

+8.9

nil

OnTheMarket (LSE:OTMP)

OTMP

92.5

+8.8

nil

Globalworth Real Estate Investments (LSE:GWI)

GWI

€ 5.83

-4

5.3

Adams (LSE:ADA)

ADA

8

-5.9

nil

Dolphin Capital Investors (LSE:DCI)

DCI

3.6

-6.5

nil

Arricano Real Estate

ARO

27.5c

-8.3

nil

Inland Homes (LSE:INL)

INL

40.5

-31.4

nil

KCR Residential REIT (LSE:KCR)

KCR

13.5

-38.6

nil

Pires Investments (LSE:PIRI)

PIRI

6.1

-59

nil

Purplebricks (LSE:PURP)

PURP

24.85

-75

nil

Life Science REIT (LSE:LABS)

LABS

101

na

4*

Source: SharePad. Prices as at 11 April 2022. *target yield.

Globalworth Real Estate Investments (LSE:GWI) is the second-largest company in the sector, and it is also the only dividend-payer where the share price has declined. Globalworth has a portfolio of offices in central and eastern Europe, but Covid-19 related restrictions have hampered plans to fill unoccupied space.

The dividend was reduced in 2020 and 2021; the expectation is for it to rise this year, but not to past levels.

Self-storage sites owner and manager Lok'n Store (LSE:LOK) has a significant opening programme that will add 49% to space, providing rapid growth in net asset value and steady increases in dividends. Strong demand for space meant that prices were increased and occupancy rates improved from 69.6% to 85.8% in the year to July 2021, with new sites filling up faster than ever. Even so, it can still take a couple of years for a site to mature. With those that are up and running combined with the ones yet to open, there is plenty of growth to come.

The dividend was raised by 2p a share to 15p a share and it is set to rise by 2p a share for at least the next two years.

Broker finnCap recently upgraded its July 2022 net asset value (NAV) forecast for Lok’nStore to 822.1p a share, rising to 892.7p a share one year later. This followed the £37.2 million disposal of four freehold stores, which was 17% more than the previous valuation in July 2021.

Following the cash inflow, finnCap estimates loan to value of 8%, with a bank facility of £100 million. There is a pipeline of 12 new sites and that is more than enough to fund the construction and opening of these sites.

LoknStore is trading at a premium to NAV, but rivals such as Big Yellow (LSE:BYG) and Safestore (LSE:SAFE) are trading on higher premiums and do not have balance sheets that are as strong or the potential growth rate of the AIM company. For example, Big Yellow is trading at a 52% premium to NAV, whereas LoknStore is trading at a 26% premium. There is more to go for in the share price.

Franchised property and lettings agents have been some of the better performers. The Property Franchise Group (LSE:TPFG), Belvoir (LSE:BLV) and M Winkworth (LSE:WINK) all benefited from the government incentives for house buyers that came to an end last autumn.

Even so, home sales activity is holding up, while the outlook for the lettings operations of the companies is positive because excess demand and limited supply is pushing up rents and the agencies’ income.

Winkworth is more dependent on sales, although it does have significant lettings revenues, and this might be the reason it has not performed as well as Belvoir and TPFG. Winkworth profit is likely to fall by more than the others, although the longer-term trend is still positive.

Both Belvoir and TPFG have substantial market shares in lettings and are also building up financial advice businesses. They have a history of dividend growth and strong cash generation.

Last year, TPFG more than doubled revenues to £24 million, while pre-tax profit jumped from £4.77 million to £6.42 million, thanks to the acquisition of rival Hunters Property. This has proved to be an excellent deal with more cost savings to come through.

Secure Income REIT (LSE:SIR) is one of the largest companies on AIM. It had problems during the Covid lockdown, but it managed to negotiate those challenges. A cash payment was made to Merlin Entertainment in return for signing a longer lease and this helped to boost the asset value. The main assets are in the leisure, healthcare and hotels sectors.

Secure Income REIT has announced it will increase its dividend from 15.2p to 18.2p a share this year. Net tangible assets are set to rise from 424p a share to 446p a share in 2022, and then to 474p a share at the end of 2023. The share price is nearly up to that level already. 

Shares at a big discount

Within the sector there are some high share price discounts to NAV. Wynnstay Properties (LSE:WSP) had an NAV of 918p a share at the end of September 2021, which means that the shares are trading at a discount of 27% to NAV. There has been a subsequent £150,000 disposal gain. The portfolio is predominantly industrial property.

Lack of liquidity is a problem for Wynnstay Properties and that will account for some of the discount. But it has a good track record, with NAV more than doubling over 15 years, and the dividend has risen by around 150% over the same period.

Midlands-focused Real Estate Investors (LSE:RLE) has been trading on a significant discount to NAV for the past couple of years, mainly down to properties becoming vacant. There have been some delays in securing new occupants, but occupancy rates should recover from 85.8%.

Debt has been reduced via non-core disposals. Net tangible assets are expected to improve from 58.8p to 60p a share this year, which means the shares are trading at a 33% discount, while offering a yield of more than 8%. This provides further upside for them.

Management wants to increase the scale of Real Estate Investors, so it would like to secure a merger with another property investor of a similar size. This is likely to take the business into additional regions and would mean that the geographic focus would no longer be just the Midlands.

Circle Property (LSE:CRC) invests in office and industrial assets, and it has begun a targeted disposal programme that will lead to additional cash distributions to shareholders, possibly via tenders or share buybacks. The discount to forecast NAV of 277p a share has narrowed to 15%.

The first disposal raised £34.5 million and this has moved the businesses into net cash of £3 million. There are 10 other properties with a book value of £76 million, and another disposal is in progress at 26% above book value. This suggests that there is upside to the current NAV, so further short-term gains are likely as shareholders get their money back over the next three years.

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

Andrew was recently named Journalist of the Year at the 2021 Small Cap Awards.

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.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.