When buying AIM shares diligence and patience are required

The Alternative Investment Market (AIM) has a reputation for volatility. Whenever stock markets experience a wobble, it seems that AIM always gets hit harder and faster than the main UK equity market.

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The Alternative Investment Market (AIM) has a reputation for volatility. Whenever stock markets experience a wobble, it seems that AIM always gets hit harder and faster than the main UK equity market.

This phenomenon is well-established, and most recently evident in the general market sell-off experienced during the final three months of 2018. Over this period, the FTSE AIM All-Share Index suffered a 21.8% fall in value, while the FTSE 100 Index declined by 10.4% over the same three month period. Happily, such periods of extreme correction tend to be rare and relatively short-lived. During the first five months of 2019, the AIM Index performed positively, posting a capital gain of 11.8%, thereby eliminating around half of the ‘losses’ experienced during the final quarter of 2018.

However, the long term track record of AIM is also uninspiring as far as capital appreciation is concerned. In the 23 years since 25 March 1996 to the end of May 2019, the capital value of the FTSE AIM All-Share Index has actually decreased by 2.8%. By contrast, over the same period, the FTSE 100 Index has posted a capital
gain of 94.5%.

With these facts in mind, most rational investors might sensibly choose to ignore AIM altogether, however in my experience ‘judging a book by its cover’ is nearly always a mistake – there is more to AIM than might initially be apparent.

Firstly, AIM is diverse, with over 900 companies currently listed on the exchange. Secondly, investing in AIM companies can offer distinct and highly attractive tax benefits. Finally, and perhaps most importantly, AIM is home to a meaningful number of truly outstanding companies, each of which started their quoted lives as relatively small and pretty much unknown businesses that have thrived since listing on AIM to become world-leading and very valuable enterprises.

From an investor perspective, it therefore pays to be diligent, highly selective and patient when building a portfolio of AIM companies. However, such a portfolio, if constructed carefully, should be capable of comfortably beating the total returns from the FTSE 100 Index over holding periods of five years or more.

Related: AIM is a stock picker’s market

Two examples of businesses that are listed on AIM, but which are currently very small and little known, are APC Technology and Wey Education. Stakes in both these businesses are held in Unicorn’s AIM-focused VCT.

APC Technology Group plc (LON:APC)

APC Technology is a distributor of specialist electronic components. The business has experienced a troubled history in recent years but, under the leadership of its CEO, Richard Hodgson, APC has been completely and successfully transformed, returning to its roots as a trusted supplier of highly reliable, top quality and technologically advanced electronic components.

The business is now firmly back on the growth path, demonstrating steady organic growth, combined with a series of small, but earnings enhancing acquisitions of similar ‘value-add’ distributors. APC boasts an impressive list of blue chip clients within the defence, aerospace, industrial, real estate and logistics arenas, as well as in healthcare and across the broader public sector.

Annualised revenues have grown from £15.7m in 2017 to a forecast of over £22m for the current financial year, profitability is consistently improving and, thanks to strong cashflow and good management of working capital, net debt is reducing rapidly.

The business is certainly capable of generating a turnover of more than £50m pa within the next few years and it should be possible, with increased scale, to consistently deliver a return on sales of at least 10%. APC is unlikely to ever become a massive business, but with its recovery firmly underway and a current market value of around £16m it looks a business worthy of consideration.

Wey Education plc (LON:WEY)

Wey Education is the UK’s leading provider of online educational services. Using state of the art digital technology, Wey operates two established divisions
– InterHigh, a fee paying online secondary school, and Academy21, a business providing other educational providers, schools and local authorities with various advanced, online education services. With a 14 year track record, Wey Education is the UK’s leading company in this emerging sector and has successfully educated thousands of students over its history.

The beauty of online education is its potential to deliver the highest quality education anywhere and at any time in a hugely flexible way and all at a highly competitive price. However, the traditional schooling model has been slow to adopt emerging technologies. Wey Education is working hard to accelerate student numbers by systematically breaking down the perceived barriers that parents face when considering an alternative education approach for their child.

Wey Education still has a lot to prove from an investment perspective but, it is well placed to succeed, being the leading expert in online education in the UK. Given the breakneck pace of technological advance, it is surely only a matter of time before online education becomes widely adopted.

Chris Hutchinson is director and senior fund manager at Unicorn Asset Management

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