This is what 2023 has in store for AIM’s £1bn companies

AIM is the world’s worst-performing major stock market index of 2022, but there are some big companies here that our award-winning AIM writer believes will grow again in 2023.

The number of AIM companies worth more than £1 billion has nearly halved over the past year. All the companies that are still valued at above that level have lower share prices, some up to three-quarters lower, so I believe there is potential for a rebound for some of them this year.

At the end of 2021, there were 30 companies worth more than £1 billion and this number has declined to 16. Abcam has left AIM and is concentrating on its Nasdaq listing, while online fashion retailer ASOS (LSE:ASC)has moved to a premium listing, although it is also currently worth less than £1 billion.

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Secure Income REIT, Blue Prism and Clinigen have all been taken over. Their combined valuation was £3.9 billion - slightly more than their total value at the beginning of the year.

The companies that fell below £1 billion are fuel cell developers ITM Power (LSE:ITM) and Ceres Power Holdings (LSE:CWR), investment manager Impax Asset Management Group (LSE:IPX), identity services GB Group (LSE:GBG), online retailer Boohoo Group (LSE:BOO), floor-coverings supplier Victoria (LSE:VCP), training services provider Learning Technologies Group (LSE:LTG), commercial flooring supplier James Halstead (LSE:JHD), Dublin-based healthcare services provider Uniphar (LSE:UPR), Eastern Europe property investor Globalworth Real Estate (LSE:GWI)and video games developer Team17 (LSE:TM17). All these companies are still in the top 50 AIM companies.

ITM Power and Boohoo are the two worst performers among these companies - and in the FTSE AIM 100 index - declining by 76.6% and 70.6% respectively.

Two newcomers

There are two companies in the list of 16 that were not there at the end of 2021. GP and pharmacy IT supplier EMIS Group (LSE:EMIS) has risen on the back of a takeover bid, which should be finalised in the first quarter of 2023. The company will then leave AIM.

The other is renewable energy projects owner Greencoat Renewables (LSE:GRP). It is also the only other company in the list that has a higher share price now than it did at the start of the year. Downside is limited and upside is not capped for most of its supply deals in Ireland. Higher energy prices have boosted cash generation and additional cash was raised at €1.12 a share earlier in the year.

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Shareholders recently agreed to a change of investment policy so that more can be invested outside of Ireland. The September 2022 net asset value (NAV) was €1.101 a share and the latest quarterly dividend was €0.01545 a share. The prospective yield is more than 5% and Greencoat offers steady growth as well as income.

Top performers

Video games services provider Keywords Studios (LSE:KWS)was the largest company on AIM, but has just been overtaken by HUTCHMED (China) Ltd (LSE:HCM), which has had a strong month. Keywordscontinues to make acquisitions to build up its range of services, and its share price has held up better than most on the list with a modest 5% decline in 2022.

Keywords Solutions has always traded on a heady rating and the prospective multiple is still 29, which is relatively high given the reductions in multiples of many other companies. That probably limits short-term upside.

Veterinary practices operator CVS Group (LSE:CVSG)andSmart Metering Systems (LSE:SMS) have also held up well and outperformed the AIM market, which is down over 30% in 2022, indicating its resilience in tougher times. CVS generated like-for-like growth of 7.4% in the four months to October 2022. SMS has a significant income stream that is index-linked so it is in a strong position, and the prospective yield of 3.9% helps hold up the share price.

…and the worst

In contrast, the worst performer among these companies is mixer drinks supplier Fevertree Drinks (LSE:FEVR)with a three-fifths decline in the share price. That reflects the optimistic valuation, although tough consumer conditions have held back sales growth and knocked profitability. A prospective multiple of 49 leaves little scope for upside until there are signs of improvement in consumer demand.

The halving of the HUTCHMED (China) Ltd (LSE:HCM)share price had knocked it off the top spot in terms of valuation, but there was a recovery during the autumn which sent it back to number one on AIM at well over £2 billion. Positive news for colorectal cancer drug candidate fruquintinib has helped.

Cash outflows remain large, and the losses mean that there is little to underpin the valuation, and share price movements will be based on news concerning potential drugs.

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It has been a bumpy ride for Jet2 (LSE:JET2) in the past three years, but its prospects are looking better. The budget airline and tour operator says bookings are in line with pre-pandemic levels. The airline had a load factor of 90.7% in the first half (this measures how well an airline fills its planes). Broker Peel Hunt has upgraded its 2022-23 pre-tax profit estimate before forex changes from £291.1 million to £315.9 million. That equates to less than 10 times prospective earnings. There is still uncertainty about consumer spending, though.

Translation services provider RWS Holdings (LSE:RWS)is another company that has had a sharp fall, and its valuation appears increasingly attractive. Revenues grew by 8% to £749.2 million in the year to September 2022, and underlying pre-tax profit was 17% higher at £135.7 million. There were reduced volumes from some large technology clients, while RWS has stopped working with one client which became a competitor. Favourable foreign exchange movements helped to improve margins.

Net cash was £71.9 million at the end of September 2022. The prospective multiple is 14, which appears low for a company with such a track record of earnings growth – earnings have more than quadrupled over the past decade. However, growth will be harder to come by now the business is larger, so the rate of improvement is likely to slow.  

Industrial intelligence provider GlobalData (LSE:DATA) has secured an enlarged debt facility of £410 million that lasts until 2025 and this will fund further acquisitions. There is a recurring subscription-base to revenues and invoiced forward revenues are £114.6 million. This means that cash generation is better than recognised profit.

Underlying growth is running at 10%. Annual percentage earnings growth of the existing operations is expected to be in the teens, although the prospective multiple is 30.

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Litigation funder Burford Capital Ltd (LSE:BUR) has returned to profit this year, although cash proceeds were low when compared with operating profit. Even so, there is plenty of cash to invest. Burford is trying to attract more US investors.

Construction materials supplier Breedon Group (LSE:BREE)has confirmed that it will report record earnings this year and it is fully recovering what it terms accelerating costs. Volumes have declined from their post-Covid peak in 2021, but they are still above 2019 levels. However, trading is likely to get tougher and profit could ease in 2023. The shares are trading on 10 times prospective 2023 earnings, which reflects the lack of expected profit growth over the next couple of years.  

Communications as a service provider Gamma Communications (LSE:GAMA) increased interim pre-tax profit by 16% to £43.1 million and inflationary costs are being passed on to customers. Full-year pre-tax profit of £85.2 million is forecast for 2022. The shares are trading on 15 times prospective earnings. The management succession has been finalised with Andrew Belshaw stepping up to chief executive.

Market research firm YouGov (LSE:YOU) is expected to increase pre-tax profit by more than 50% to around £52 million in the year to July 2023. That would still leave the shares on nearly 30 times earnings. A new chief executive to replace the founder Stephan Shakespeare is being sought and the market may want to assess the appointment before any improvement in the share price.

Kape Technologies (LSE:KAPE) has shown a good eye in choosing acquisitions to enhance its cyber security software range and that generate cash to pay off debt to fund the deals. In September, Kape raised $222.5 million at 265p to accelerate the reduction in debt and provide scope for further purchases. New bank facilities have reduced annual interest costs by $8 million. The prospective multiple is below eight and cash flow is strong. The shares appear attractive at this level.