Five AIM stocks for an inheritance tax ISA in 2024
One way of potentially paying less inheritance tax is to build a portfolio of eligible AIM shares. Award-winning AIM writer Andrew Hore explains how to do it and names a handful of stocks he’d tuck away for the long term.
22nd March 2024 15:00
by Andrew Hore from interactive investor
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Despite fears that inheritance tax (IHT) regulations might be changed, they are still in effect, and holding AIM shares remains a way of gaining relief from IHT. To obtain the benefit of passing on the AIM investments without them becoming subject to IHT, the shares have to be held for at least two years.
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Here are five AIM shares worth buying in ISAs and holding for the long term. They all have good records with potential for recovery and further growth.
Volex (VLX)
Price: 297p
Electrical connections and accessories manufacturer Volex (LSE:VLX) has encountered challenges in the past, but it has broadened its customer base and improved efficiency. This has enabled margins to rise as the mix of business changes and means that Volex is not dependent on any single market.
Last year’s acquisition of Turkey-based off-highway business Murat Ticaret added a fifth division to the group and widened the international spread of activities. The other main areas are consumer, industrial, medical and electric vehicles (EV).
Volex is the major supplier of EV power cords. It also has a significant exposure to the growing data centre market. Consumer is still two-fifths of business and that can be more volatile.
The latest figures are for the six months to September 2023, where revenues were 11% higher at $397.5 million, with only one-month from the Murat Ticaret acquisition. Pre-tax profit edged up 2% to $22 million. There has been some de-stocking, but that should have run its course. Around 50% of business is contract manufacture, which is not so subject to de-stocking.
HSBC expects a rise in full year pre-tax profit from $59 million to $79 million, before a jump to $90 million next year with a full contribution from last year’s acquisition. There should be $80 million of cash generated from operations in the year to March 2025.
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The shares are trading on 12 times prospective 2023-24 earnings, falling to 10 next year. The multiples do depend on the movement of the pound against the dollar. HSBC has estimated a discounted cash flow valuation of 490p/share. Volex is involved in many growth markets and that is not reflected in the share price.
SigmaRoc (SRC)
Price: 63.2p
Construction materials supplier SigmaRoc (LSE:SRC) has grown via acquisition and become a major player in the sector in the UK and Europe. An experienced management team that has worked for the more established rivals can identify potential non-core assets from those companies.
The latest and largest acquisition is lime assets from CRH, with Germany, Ireland and Czech Republic assets bought at the beginning of this financial year and the UK assets acquired more recently with Poland to follow. Lime is a scarce material and it is not just used in construction. The total consideration is $1.1 billion. SigmaRoc raised more than £200 million at 47.5p/share to help fund the deal.
In 2023, revenues improved 8% to £580.3 million, even though like-for-like volumes declined, and underlying pre-tax profit increased from £62.7 million to £71.2 million.
The high level of debt is not to investors’ taste at the present time. Net debt was £182.4 million at the end of 2023, but this will rise to £579.5 million by the end of 2024 due to the lime assets purchase. Cash generation will bring down borrowings over the medium term. Free cash flow could be £100 million each year.
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In 2024, pre-tax profit could reach £124 million, followed by £158 million next year as cost savings come through. The share price reflects the current weakness of the construction sector. It will recover and SigmaRoc is in a good position to take advantage. The prospective multiple is less than nine, falling to seven in 2025.
Cerillion (CER)
Price: £15.50
Telecoms enterprise software provider Cerillion (LSE:CER) has been one of the star performers on AIM and that is reflected in the share rating. However, taking a long-term view there is further growth to come.
Larger contracts are being won with a €12.4 million, five-year contract announced at the start of this financial year. There have been no contract announcements recently, though. Orders can be lumpy, but they provide good long-term revenues when they commence.
In the year to September 2023, revenues were one-fifth ahead at £39.2 million, while underlying pre-tax profit was two-fifths higher at £16.8 million. The order book was worth £52.5 million.
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Investment in 5G telecoms has not been accelerated as quickly as anticipated. This will happen and provide additional demand for Cerillion software, which can help to improve efficiency.
Net cash reached £24.7 million at the end of September 2023. This could increase to £30 million this year and more than £40 million by the end of September 2025.
Gresham House has cut its stake from 12.9% to 10.3% and Canaccord Genuity from 9.88% to 4.41%, without a major effect on the share price.
Viewed on a short-term basis, the share price appears fair, particularly if there is no contract news in the near future. Taking the view that the shares will be held for many years, then there is plenty of upside potential.
Judges Scientific (JDG)
Price: 11,200p
Scientific instruments manufacturer Judges Scientific (LSE:JDG) effectively started out as a shell, and it has consistently made acquisitions over the past 17 years. Even so, organic growth has been 7% per year over the period. The share price has nearly quadrupled in the past five years, and it has maintained a high rating.
Judges Scientific is an export business, and the current exchange rate helps the products to be competitive. Acquisitions of niche businesses have provided a wide geographical and sector spread, helping the company to cope with changes in economic conditions in different regions.
In 2023, pre-tax profit improved from £28.3 million to £31.7 million on revenues, rising from £113.2 million to £136.1 million as demand from China recovered.
There has been steady growth in dividends, with the latest figure increased from 81p/share to 95p/share. Net debt was £44.7 million at the end of 2023 and that figure could fall to £13.7 million by the end of this year.
There is uncertainty concerning the timing of an expedition using Geotek geological coring equipment. Whatever happens with this business organic growth is set to continue this year.
The order book is lower than last year’s which was boosted by a recovery in demand from China, but the underlying figure is still 17 weeks. WH Ireland edged up its 2024 pre-tax profit forecast to £33.8 million, which equates to a prospective multiple of 30. Forecasts at this point in the year are generally conservative and acquisitions could enhance earnings.
Focusrite (TUNE)
Price: 297.5p
Focusrite (LSE:TUNE) shares were hard hit by its recent profit warning. The audio and content creation equipment supplier enjoyed a boost to demand during Covid lockdowns and has found it difficult to maintain that level of business. Taking a longer-term perspective, Focusrite has still grown strongly since 2018-2019 both organically and by acquisition.
In the year to August 2019, revenues were £84.7 million. They peaked in the year to August 2022 at £183.7 million and even after downgrades the 2023-24 forecast is £155 million. Based on the downgraded forecast, over the five years underlying pre-tax profit will improve from £13.8 million to £19.8 million – it peaked in 2020-21 at £40.7 million.
Cash generation in recent years has funded acquisitions. Since floating, acquisitions have included Martin Audio, which expanded exposure to audio reproduction for live events, and Sequential synthesisers. Recovery in audio reproduction equipment sales had helped to offset the decline in content creation revenues.
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Focusrite continues to do well in comparison with its competitors and is investing in new products. However, the launch of some Scarlett generation 4 audio interface products has been delayed until later this year.
China and Japan have been particularly weak this year. These markets are not expected to improve in the second half. There has also been general overstocking. There will be further news in the interim statement in April.
There is a strong balance sheet, although working capital increases mean that net debt was £26 million at the end of February 2024. Focusrite should move nearer to a net cash position by August 2024 unless further acquisitions are made. There are £50 million of debt facilities.
Finance director Sally McKone bought 6,900 shares at prices between 286.8p and 297.4p. The shares are trading on 12 times projected earnings, which is modest for a company with such a strong market position and portfolio of brands. The fall in the share price makes this an excellent buying opportunity.
Andrew Hore is a freelance contributor and not a direct employee of interactive investor.
AIM stocks tend to be volatile high-risk/high-reward investments and are intended for people with an appropriate degree of equity trading knowledge and experience.
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