Interactive Investor

Watch out for these new IPOs on AIM

11th June 2021 15:28

Andrew Hore from interactive investor

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The number of smaller companies looking to list on the stock market has grown in recent months. Here are some of the most interesting.

AIM has been short of new entrants in recent years but that is certainly not true in the past few months. There has been a steady flow of new admissions and that is set to continue into the summer. 

There have been delays and false starts, though. These always get blamed on ‘the market’, although it is more likely to be something to do with the company or its expected valuation. Elcogen and Tungsten West both decided to delay their AIM flotations. 

Sometimes it means that these companies will come back later, while other times they stay private or get taken over. Vaping and consumer products supplier Supreme (LSE:SUP) floated at the beginning of February. It originally announced the intention to float in April 2018, which was postponed the following month. 

Why Elcogen may have delayed its IPO

Estonia-based fuel cells developer Elcogen believed that it should be valued at £200 million. It is difficult to assess what this is based on because of the lack of published figures. Elcogen manufactures ceramic anode-supported, low temperature solid oxide fuel cell technology, which is used for fuel cells, electrolysers and syngas production. 

At the beginning of this year, Elcogen would have been aware of the soaring share prices of fuel cell and electrolyser technology developers. They were some of the best AIM performers last year, but this is no longer the case. 

The Ceres Power (LSE:CWR) share price has fallen by one-third since early February and the ITM Power (LSE:ITM) share price has declined by around two-fifths, while Proton Motor Power Systems (LSE:PPS) nearly halved. AFC Energy (LSE:AFC) has held up best, but its share price is still around one-fifth lower. That is likely to have made a dent in the valuation expectations for Elcogen and could have contributed to the decision to delay. 

What happened at Tungsten West?

Tungsten West was effectively bringing back a project that AIM investors knew about. In December 2019, the company acquired the Hemerdon tungsten project assets from Hargreaves Services for £2.8 million. Hargreaves ended up owning these assets after AIM-quoted Wolf Minerals went bust due to processing problems and low tungsten prices. Hargreaves gained control as a way of securing cash it was owed. 

A part of this transaction was an agreement that Hargreaves would be paid a minimum of £1 million a year for a period of eight years to carry out the mining services it previously undertook at the site. This starts no later than two years from 29 November 2019. There will be advanced payments, so Hargreaves does not suffer any credit risk. 

Baker Steel Resources Trust has a £5 million convertible loan note investment in Tungsten West. The trust quotes the Hemerdon bankable feasibility study published in March, which indicated a project life of more than 20 years and post-tax net present value (NPV) of £272 million. There is £45 million of capital investment required to restart the mine. 

Recent share issues have been at 45p each, which values the Tungsten West issued capital at just short of £31 million – based on 68.7 million shares at the end of February 2021. Of course, the conversion of the loan notes would increase this. The expected valuation was £100 million. 

Tungsten West wanted to raise £20 million in the flotation, which suggests a valuation of £80 million for the existing diluted share capital. Another £40 million of debt would be required to get the mine back up and running, as well as ensuring there is enough working capital. 

The company says it intends to come back in September – just ahead of the time it will have to start paying the minimum commitment to Hargreaves. 

Watch out for these four new IPOs

There is a wide spread of new companies seeking to join AIM, though. In the past, there tended to be fashions when it came to new admissions. The latest potential new IPOs range from plumbing to medical technology. 

There is also Africa-focused gold explorer Thor Explorations planning to add an AIM quotation to its existing quote on the Canadian TSX Venture Exchange on 22 June, plus CML Microsystems (LSE:CML) and Sportech (LSE:SPO) who are moving from the Main Market. There are four completely new admissions expected in the next few weeks, though. 

Victorian Plumbing 

Victorian Plumbing is the company that has the highest profile of the expected new admissions. The online retailer of bathroom products and accessories has consumer and trade customers. It is already the second-largest retailer of bathroom products by revenues with an estimated market share of 14.2%.

The intention is to increase marketing activity and broaden the product range. In the medium-term, there will be expansion outside of the UK. Own brands account for three-quarters of sales in the year to September 2020. 

Victorian Plumbing Group is the holding company, but the main business is in Victorian Plumbing Ltd, whose accounts for the year to September 2020 have been filed at Companies House. They show revenues increasing from £151.8 million to £209.9 million, and pre-tax profit jumping from £10.1 million to £25.9 million. 

Victorian Plumbing Ltd generated £20.7 million in cash from operating activities even though inventories increased by £7.6 million. That was before £2 million of capitalised IT spending. There was £8.95 million in the bank and no bank debt - after paying £11 million in dividends last year. This suggests that the business can grow rapidly without additional cash. 

In the six months to March 2021, the group’s revenues were £140.7 million and EBITDA (underlying profit) £20.1 million, suggesting a much higher profit this year. The 22 June has been set as the target date for joining AIM. 

Orcadian Energy 

North Sea-focused oil and gas firm Orcadian Energy has a 100% interest in the potential Pilot field. It wants to raise £5 million so that the project and finance are in place in order to begin development. 

Pilot has viscous oil, and the polymer flooding technique will be used to extract the oil. This technique has been used on the Captain field in the North Sea by Chevron (NYSE:CVX) and Ithaca Energy. Shell (LSE:RDSB) has provided a loan to the company and entered into an offtake agreement. 

Breakeven should be achievable at an oil price of $39/barrel. Based on proven reserves of 58 million barrels, the NPV is estimated at $160 million. If all the potential resources are taken into account, the figure could be $640 million. 

The $1 billion cost of developing the Pilot field appears daunting. A floating production and storage offloading (FPSO) unit is the major cost. In this case the cost could be around $600 million. However, deals can be done to reduce the upfront cost by giving the FPSO supplier and operator a share of the oil revenues. 

The other $400 million of costs could be covered by debt, cash from share further issues and/or obtaining a farm-in partner. Orcadian will certainly require more money from shareholders in the future as the project is developed. 

The cash being raised should last for 18 months and enable further development of the project and provide time to secure funding agreements. The idea is to spend this money in a way where the underlying value of the project increases before any more cash is raised. 

The pre-money valuation range for Orcadian is £40-£60 million. Management is about to present to institutional investors and should join AIM at the end of June or early in July. 

itim Group

itim Group provides SaaS-based (software as a service) technology to high street retailers, helping them to compete with their online rivals. The software is called The Retail Suite and modules are used by 60 retail brands around the world. Management believes that Covid-19 will provide additional opportunities as high street retailers increase their focus on mobile and online business channels, as well as how they integrate with the traditional operations. There is little in the way of upfront costs if retailers sign up for the software. 

There are customers in the UK, Portugal, Spain, the US and South America. Annual recurring revenues have grown by 55% since the end of 2017. That was about it for financial information in the intention to float announcement. 

The 2019 accounts have been published on the Companies House website. Revenues increased from £10.6 million to £11.7 million, although there was a dip in pre-tax profit from £269,000 to £206,000 – there was a tax credit in each year. That is after an increase in directors’ remuneration from £798,000 to £899,000. 

Capitalised development costs increased from £610,000 to £918,000, well above amortisation, and this was spent on increasing functionality, mobile and artificial intelligence (AI). Net debt was £237,000 at the end of 2019. There were also tax losses of £10.6 million at the end of 2019. 

Of course, there has been nearly 18 months of trading since these figures. What they do show is that this is a profitable business in normal times. 

itim wants to raise £10-£12 million to take advantage of opportunities. This business appears similar to that of the former AIM company Sanderson. 

Spectral MD

Spectral MD is a developer of imaging technology and AI algorithms for faster wound care treatment decisions. The company is based in Dallas, and it is setting up a UK operation in order to gain approvals and move into European markets. 

Spectral’s DeepView wound imaging technology can be used to distinguish damaged and healthy human tissue, which cannot be done with the human eye. Early clinical decisions can reduce the time to recovery and improve the outcome. 

DeepView has FDA Breakthrough Device Designation for burn indications and cash raised in the flotation would fund further development and clinical trials in using the technology for diabetic foot ulcers. There are more than 415 million people with diabetes around the world. 

Spectral also wants cash to build up a US distribution network as well as a sales infrastructure in Europe. The AIM admission is likely to happen in late June. 

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