Not taking Aim

Engineering companies are fighting shy of the USM’s replacement. Hugh Sharpe reports Since its launch 20 months ago the Alternative Investment Market (Aim) – the London Stock Exchange junior market – has attracted 256 companies, which together have raised £931m and the current capitalisation is close to £5.3bn. Aim was created to help young and […]

Engineering companies are fighting shy of the USM’s replacement.

Hugh Sharpe reports

Since its launch 20 months ago the Alternative Investment Market (Aim) – the London Stock Exchange junior market – has attracted 256 companies, which together have raised £931m and the current capitalisation is close to £5.3bn.

Aim was created to help young and growing companies raise capital cost-effectively and provide investors with a properly regulated market. It replaces the Unlisted Securities Market, which closed in December, and the Rule 4.2 market where shares were only traded on a matched-bargain basis. Aim has recruited around 100 of its companies from these markets; the rest are newcomers to the stock market.

Most companies join to raise money and Aim has many attractions as a route to the capital market. It is usually cheaper and always easier to join than the main market, and takes new companies with no trading record. Others join to allow venture capitalists to bale out, or simply to raise their profile.

Although Aim has attracted a host of high-tech companies – electronic equipment makers, computer software, and telecom players abound – it does not seem to excite much interest among `pure’ engineering companies.

So far there are only 12 rated by the Stock Exchange in that category – fewer even than the foreign companies trading on Aim. In contrast, the market lists 17 electronics companies and 50 `support service’ firms, many of them information technology businesses.

The combined market value of the 12 engineering companies in Aim is £137m and they have raised £24m from the market.

Aim investors are largely rich individuals in it for the tax concessions the Inland Revenue allows the market, or for a bet on a promising newcomer. More Aim stocks than otherwise stand at a premium to their launch price. But institutional investors are rare. Many funds are prevented by their own rules from joining. There are those who still worry about the quality of Aim companies overall, and whether the rules to protect investors are strong enough.

The launch of Airtech, the mobile phone amplifiers maker, spotlights Aim investors’ ready appetite for high-tech. Here was a company which had just reported an interim £680,000 loss and with no full year profits in sight, smoothly raising £10.4m from investors, and later watching its shares trade at a 60% premium to the placing price as fresh punters climbed aboard.

Guy Peters, of broker Albert E Sharp, says he expects the company to be in profit this year.

Investors are drawn to high-tech by their rapid growth. Sales of Flomerics, a computer software outfit launched via an institutional placing at 130p a share and trading now at around 230p, is growing at an annual 30%. It made £416,000 in 1995 and £500,000 is forecast for 1996. The company floated to allow its venture capitalists to exit, and did so by raising £560,000 from the market at the launch and a further £1.5m last May.

But market sentiment on high-tech tends to see-saw. Last summer, when the stocks were in favour, Intelligence Environments (IE) floated at a high price. Its Amazon software is a `development tool’ which is effectively a system to manufacture other software tailored to clients’ requirements. Customers include Tesco and Honda. IE raised £5.6m on its float to expand its sales and marketing programme in the UK and the US. But the climate has changed, and the 66p the shares trade at now is a far cry from the placing price of 94p.

High-tech companies tend to be newish and more prepared than most to part with equity to grow quickly. In contrast, engineering concerns are often old-established family businesses wary of losing control. Even the fact that Aim allows a company to retain as much equity as it wants, whereas in the main market at least 25% must be in public hands, does not seem to sway them.

High-tech versus engineers

Some watchers blame the dearth of engineers on Aim investors’ preference for the more exciting high-tech, media, and leisure companies.

Greg Aldridge, of merchant bank Brown Shipley, agrees that these gain higher ratings on Aim than plain `metal-bashing’ outfits. But he contends that there is plenty of investment support awaiting `solid’ engineers such as Shalibane, the automotive tubing outfit he brought to Aim last October. It has proved a market success with shares now trading 25% above their 125p placing price.

`I believe the market climate is changing and that some of last year’s riskier Aim ventures wouldn’t find takers if they were seeking to launch now,’ says Aldridge. `I like to offer solid companies which made profits last year and the year before, will make profits this year and again next.’

Neil Austin, head of new issues at KPMG and an Aim adviser, concedes that an engineer with 15% annual growth is less attractive to investors than the potential 50% of a high-tech high flyer. And he believes that there is no particular incentive for the small engineer to come to Aim anyway. `Typically, a small engineer, say with £10m sales and £1.5m profits, will only need access to the capital market if it’s minded to expand via acquisitions. But comparatively few want to do that.

`And if it’s a case of marketing a family stake or cutting it down, floating on Aim is more hassle than selling to a trade buyer or a venture capital outfit, though the stock market route would usually provide the better price,’ Austin says.

Another theory is that the `conservative’ engineering community does not rate Aim’s image highly. It has certainly produced some losers. A recent survey by Extel into smaller companies found that 80% of investment fund managers using Aim `believe the quality of the stocks quoted is poor if not abysmal’.

Celia Glynn-Williams, Aim marketing manager, argues that Aim companies could not have raised the money they have if so many investment managers took that view of the market.

Theresa Wallis, Aim’s chief operating officer, says: `It’s still a relatively new market and many engineers are only just beginning to consider it as an option for raising capital and having their shares more widely traded.’

Aim’s biggest engineering success story is Cirqual, the aluminium extrusion and thermoplastics manufacturer. Its shares chalked up a 30% gain on the placing price in the five months it traded on Aim before promotion to a full listing last month.

`When we floated on Aim last July [raising £5.35m] we were on the small side for the main market, though we said at the time we’d move to it with our first big acquisition,’ says Steve Powell, managing director. `That has duly happened with our purchase of Wollaston [a components maker] for £11m.

`The upgrade is important because we aim to expand our niche engineering business by acquisition, and need the benefit of the main market to finance that programme. A lot of institutions don’t stake the Aim market at all, so that narrows the field.’

Mechanical and electrical engineer NECA came to market to raise its profile and to allow venture capitalists to exit.

Kevin Mercer, its chairman, says: `The float gave an outlet to investors in a business expansion scheme fund which owned 50% of our capital. They now own NECA shares direct. Having a quote also alerts directors more to their responsibilities. And that’s important.’

Engineering disappointments include Jasmin, a `miniature GEC’ in the defence and transport technology systems business, whose shares are trading at their lowest ever rate, well down from the placing price. Jasmin’s half-time profits were heavily down despite higher turnover.

Another unhappy company is Scotswood, where an acquisition failed to deliver. A 1996 loss is forecast and the shares have recovered to 9.5p from a low of 5.5p against a year’s high of 31p. A new chairman, banker Sir Aubrey Brocklebank, has joined to sort things out.

Of Aim’s engineers, Antonov accounts for nearly one third of the combined £137m market value of the 12 companies.

Antonov (market capitalisation £54.40m) whose revolutionary automatic gear change is under test by several car makers, is also one of the most volatile. In the past year its shares have ranged from 121p down to 48p, and at the time of going to press stood at 72.5p.

These ups and downs leave Bill Emmerson, managing director, unfazed. `Aim gives us just what we need: ready access to the capital market and a trading post for our shares.’

Entry rules

While Aim is more tightly-regulated than its forerunners, there was criticism that rules of entry were too slack for investors’ health. That criticism may be silenced by some tightening of the rules announced in December.

Joiners must now give two weeks notice, instead of the previous three days. More details about the company are required. It must reveal names of directors and shareholdings of more than 3%, what funds it wants to raise, and nominated advisers and stockbrokers.

The Stock Exchange has vetted the 62 Nominated Advisers (nomads), ranging from merchant banks and stockbrokers to corporate finance boutiques and capital venture outfits. A joining company must appoint a nomad for its market launch and retain it to keep its quote.

David Buxton, an investment analyst with stockbroker Henry Cook, says that although the nomad list has opened the door to corporate advisers other than the closed shop of merchant banks and stockbrokers, flotations are unknown territory to some.

`There’s a danger that companies turned down as unsuitable by the major nomads will turn to smaller fry who will float them when they aren’t really ready for it,’ says Buxton.

When Aim started, nomads competed with cut-price packages to win the business and companies were joining for £50,000 or even less.

Launch fees have now settled down to between 7% and 10% of any new money raised, or a flat fee of £100,000 if no new cash is involved, according to an Aim spokeswoman. The Stock Exchange levies additional fees: £2,000 in the first year, £3,000 in year two, and £4,000 from then on.

{{ENGINEERING COMPANIES LISTED ON AIM

Date Market Cash Turnover Pre-tax founded capitalisation raised £m £m profits £m

Antonov 1991 54.40 1.50 0.32 -1.50Eve Group 1931 16.40 Nil 48.80 0.75Fieldens 1982 3.27 1.00 6.15 0.24Gall Thomson 1978 17.30 8.25 5.90 0.72Jasmin 1969 2.67 Nil 3.01 0.15Jordec 1986 8.47 5.70 7.57 -0.61NECA 1961 1.32 Nil 11.28 0.17Scotswood 1969 0.42 0.59 1.51 0.02Scruttons 1930 15.40 Nil 33.84 1.16Self Sealing 1984 1.78 1.26 0.11 -0.84Shalibane 1942 7.42 3.00 7.00 0.29Weeks 1973 7.90 2.25 11.70 0.49}}