Interactive Investor

The companies behind AIM's incredible rally

6th October 2017 15:36

Andrew Hore from interactive investor

Big companies that continue to propel the performance of AIM. Not only are the FTSE AIM 50 index and the FTSE AIM 100 index outperforming the FTSE AIM All-Share, it's the largest constituents that are doing especially well, helping AIM thrash the Main Market.

People tend to think that small companies can grow faster but this can ignore the potential of larger small-cap rivals. While these are AIM companies, some are capitalised at more than £500 million and have made huge share price gains.

According to the latest fact sheet from the FTSE AIM index series compiler FTSE Russell, the FTSE AIM 50 has achieved a total return of just short of 100% over the past five years. The compound return per annum over the same period is 14.9%. Even in the year to date the return is 25%. The vast majority of the constituents has increased in value this year.

This return is not just about share price performance, it also includes dividends. Excluding online fashion retailer ASOS, nearly all the companies with the highest weightings in the index pay dividends.

The FTSE AIM 100 has outperformed the FTSE AIM 50 over this year with a 26.8% return, but over a five-year period the return is 69.3% - a compound annual growth rate of 11.1%.

It's important to remember that the FTSE AIM 100 is an international index, whereas the FTSE AIM 50 is focused on UK registered companies. Online fashion retailer boohoo.com is registered in Jersey so it is not eligible for the FTSE AIM 50, even though it is effectively a UK business and is one of the largest companies on AIM.

Heavyweights

Historically, there has been a larger weighting of resources businesses in the FTSE AIM 100, which may be part of the reason for the relative underperformance. For example, African Minerals was worth more than £1 billion around five years ago, but it subsequently went bust.

There were also some property funds which have not performed well, plus some Chinese companies, such as Asian Citrus (which was once one of the top 25 AIM companies by market capitalisation), whose share prices have slumped.

The FTSE AIM All-Share, while lagging behind the big boys, has smashed through through the 1,000 level to its highest since 2008, and is 20% ahead so far this year. The five-year return is 51% - a compound annual growth rate of 8.6%. That compares with the FTSE 250 up 11%, and the FTSE All-Share and FTSE 100 up just 6% and 5% respectively.

A limited number of companies have a significant effect on the performance of each index. Nearly 49% of the weighting of the FTSE AIM 50 comes from 10 companies. The top 10 in the FTSE AIM 100 have 36% of the weighting of that index.

Online fashion retailer ASOS has always had a significant influence on each index and it is one-eighth of the FTSE AIM 50 and 7.76% of the FTSE AIM 100. Although the share price is only one-fifth higher this year it still helps to underpin the growth in each AIM index.

ASOS is even 5.2% of the FTSE AIM All-Share – it should be noted that not every AIM company is in the AIM All-Share index and there are currently 808 constituents. The top 10 account for nearly one quarter of this index.

TOP 10 FTSE AIM 50 COMPANIES WEIGHTING % % CHANGE (9 months)
ASOS 12.6 20
Fevertree Drinks 8.4 92
Clinigen 4.6 50
Abcam 4.3 33
CVS 3.6 32
Purplebricks 3.2 175
IQE 3.2 228
James Halstead 3.1 -10
Conviviality 2.8 91
Scapa 2.8 32
TOP 10 FTSE AIM 100 COMPANIES WEIGHTING % % CHANGE (9 MONTHS)
ASOS 7.8 20
Hutchison China MediTech 6.1 77
Fevertree Drinks 5.2 92
boohoo.com 3.4 57
Clinigen 2.9 50
Abcam 2.7 33
CVS 2.2 32
Plus500 2.0 133
Purplebricks 2.0 175
IQE 2.0 228

...and big hitters

Even if an AIM company is included in an index it might not have a 100% weighting for its market capitalisation. The weighting could be affected by perceived liquidity. Litigation finance provider Burford Capital is the fifth-largest AIM company and it is in the FTSE AIM 100, but its weighting is lower than IQE, which is less than half its size.

The weightings in each index are based on the current valuations of the constituents. This means that it is after their recent share price rises, and many would have had much lower weightings at the beginning of the year. There are also companies that have been taken over or moved to the Main Market, such as Sirius Minerals.

Technology, healthcare and consumer-related companies have done well this year. Spirits mixers supplier Fevertree Drinks continues to go from strength to strength and is not far from doubling this year. Drinks distributor and retailer Conviviality is starting to benefit from the consolidation of last year's acquisitions.

Semiconductor wafers supplier IQE has soared in 2017 and the share price is still more than treble the level at the start of this year, despite profit-taking – unsurprising considering the share price at one point had risen by 10 times in little more than two years.

Last year's star flotation, robotic software provider Blue Prism, has more than doubled again. The rating is enormous but the company does tend to spark a forecast upgrade with every trading statement.

Unlicensed medicines distributor and speciality pharmaceuticals supplier Clinigen and antibodies retailer Abcam's share price rises of 50% and 33% respectively appear modest compared to some gains, but they are impressive for companies valued at more than £1 billion.

Volatility

Not all the large companies have done well. Telit Communications' problems with its former boss Oozi Cats and his past misdemeanours meant that its share price fell by more than one-third, and it crashed out of the FTSE AIM 50 and the FTSE AIM 100.

Technology company share prices can be volatile. WANdisco had previously fallen out of the FTSE AIM 100 as it lost its premium valuation after disappointing investors, but it has bounced back by quadrupling its share price this year and returned to the index in the latest changes.

Online derivatives trader Plus500 has also been a company that tends to either do very well or very badly in a year. This year it is doing well.

There appears to be increasing investor interest in resources companies and some have performed well this year, but they tend to be the small ones that have little influence on how any AIM index performs. In contrast, the share prices of oil and gas explorers Sound Energy and Hurricane Energy, which had been strong performers in previous years, each fell by around one-third. The Firestone Diamonds share price fell by nearly two-thirds in the first nine months of this year.

SolGold rose by 40%, but it has moved to the Main Market, while UK Oil & Gas has nearly quintupled so far this year. UK Oil is an example of an AIM company that has been built up using a shell that previously had a completely different business.

That is why in the AIM statistics, UK Oil & Gas is in the technology hardware and equipment sub-sector, having originally been antennas developer Sarantel. It seems strange that management has not asked for the category to be switched, but it means that the oil and gas sub-sector performance has not benefited from the UK Oil & Gas share price rise.

Keeping up the momentum

It does appear that it will be difficult for AIM to continue to rise at its current rate, but it has seemed that way for a while. Some of the largest AIM companies are trading on prospective multiples of 30 or more. These are companies that have strong track records, but it may be difficult to continue to achieve the level of outperformance in recent years.

It is also important that the larger companies do not slip up, so their share prices dive and drag down the index. Purplebricks still has to achieve the growth needed to warrant its share price rise and much will depend on its new US business.

There are still some more modestly rated AIM companies that are a significant size and there are newer companies with potential to grow. Some of those newer companies will trip up, like toilet roll maker Accrol, but they can provide further growth for AIM.

Marketing services provider Cello and utility infrastructure installer Fulcrum Utility still have relatively modest ratings and have potential for long-term growth and there are new opportunities coming along all the time.

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.

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