While the Alternative Investment Market (AIM) remains popular for early-stage companies seeking an initial market listing, the main indices of the London Stock Exchange also contain a significant number of smaller quoted UK companies.
Excluding closed-ended investment companies, there are around 200 quoted smaller companies listed on the main market, either as constituents of the FTSE Small-Cap or FTSE Fledgling Indices.
This corner of the market tends to be overlooked by larger investors and yet it offers a range of attractive businesses that extend across a variety of sectors.
Vp plc – A family business
One example of a business currently listed on the FTSE Small-Cap Index is VP Group, a specialist rental company that is headquartered in Harrogate, North Yorkshire.
Vp serves a diverse range of customers in both the UK and International markets, renting specialist equipment to the construction, infrastructure and oil & gas sectors.
The company floated on the stock market in 1973 and currently has a market capitalisation of over £320m. In spite of its stock market listing, the company remains closely controlled by the Pilkington family, with Jeremy Pilkington, son of the founder, acting as the company’s chairman since 1981.
Investing alongside founding family members, such is the case with VP, can provide meaningful protection for minority investors. Most notably, a founding shareholder, who retains a significant stake in their business, will typically adopt a prudent, long-term approach to future growth.
Obviously, liquidity will always tend to be an issue for this type of company and a barrier to investment for many of the larger institutional investors.
Roughly 50% of VP remains in the ownership of the Pilkington family trust, while the balance of shares are held by a range of institutional and private client investors.
In order to help reduce liquidity issues, it is important to maintain strong trading relationships at all the main UK small-cap broking firms. Being aware of interest from other buyers and sellers is an important tool in enabling larger blocks of shares to trade in a company for which reported liquidity is low.
Mears Group plc – Actively traded
A second example is Mears Group. From its origins in the late 1980s as a small maintenance contractor in Gloucestershire, Mears has grown to become one of the UK’s leading provider of services to the social housing and care sectors.
The company is the market leader in the maintenance and management of social housing, with numerous long term contracts with local authorities across the UK. Mears has experienced challenging trading conditions over the past two years and management have taken steps to exit unprofitable and capital intensive areas of its business.
In addition, investor sentiment towards companies operating in the support services sector has been negative since the widely reported financial collapses of Carillion and Interserve. As a result, Mears’ p/e has declined in the past three years from a peak of 16x to a current level of 9x forecast earnings. Despite these challenges, the company’s recent half-year results report on an improving outlook for the group, including a targeted reduction in debt and scope for significant contract wins.
Despite having a market value of less than £300m, shares in Mears Group tend to be more actively traded than VP, reflecting its more diversified shareholder base.
Max Ormiston is assistant fund manager to the Unicorn Outstanding British Companies fund.
See also: Small cap growth stocks to watch – David Thornton argues that political uncertainty strengthens the case for investing in small caps.