More companies are leaving the London Stock Exchange with few companies listing to replace them. This is an historic trend that was partially reversed by the Covid floats, where companies would list on the back of excellent trading updates and mediocre past performance, and try to convince investors the growth was here to stay rather than a fleeting period.
And it worked. Funds and investors piled into stocks, many of which have already gone bust. Anyone remember MADE.com? Parsley Box? Or the companies who listed and joined the 90 per cent club – stocks who have seen their prices decline by 90 per cent? Musicmagpie, ProCook, there are many…
There are also plenty of stocks now leaving the market because private equity is taking out companies that are undervalued by the market. Accrol (ACRL) is the latest, where management has recommended an 11.8 per cent premium offer to the prevailing share price at 38p.
That's because the share price has been weak since late 2018 and the significant turnaround in the business has not resulted in a sustained recovery. The board says the “wider AIM market has suffered significant challenges and has as yet not resulted in a strong upward trend of the share price” despite the profit upgrades and margin improvements. Is this fair? Sadly, I think so. The board explicitly mention the difficulty of raising equity for any expansion, and that the offer is a positive outcome for all stakeholders and shareholders.
Another departure is Bidstack (BIDS) which has delisted. This was a company (and still is, just no longer listed) that offered native in-game advertising into video games. Despite raising over £40mn from the London Stock Exchange, the company has gone into administration where two directors have bought it. To the best of my knowledge there was no attempt to raise funds through equity, leaving shareholders disgruntled. This is nothing new, but shows how slippery Aim can be for shareholders.
Another stock which has been listed since October 2022 is Sondrel (SND). Bizarrely, when the company placed the Siemens stake in December it decided not to raise funds. I say bizarre, because the balance sheet and cash flow statements told me that the company was badly in need to capital. Two months later I was correct as February’s payroll was unable to be met.
But amidst this doom and gloom there are positives, and the number of stocks hitting 52-week highs is growing.
Frontier Developments
One stock that looks to potentially be forming a stage one base is Frontier Developments (FDEV). This company has been a rollercoaster (pun intended – for those who aren’t aware Frontier Developments is the creator of the popular Rollercoaster Tycoon series) stock nearly tenbagging in 18 months from early 2017, to more than halving in 2018. It then quadrupled from the lows to early 2021, and has since fallen around 95 per cent.
The problem with the oft-romanticised “our favourite holding period is forever” quote from Warren Buffett, is that while it may be his favourite holding period, the fact is that the future is increasingly unpredictable. Indeed, the world is completely different now to what it was in 2000, and the difference continues to grow. Businesses and their future prospects change. Pandemics, global interest rate rises, and wars will do that. And whilst Warren’s favourite holding period may be forever, the private investor cannot just assume that what works for Buffett will work for them. It’s unlikely that you don’t (and I am certainly in the same basket) have the same skillsets as Buffett. My belief is that shares are there to buy and sell rather than to hold through thick and thin. There are no prizes for loyalty. Only P&L.
Frontier has had a rough few years as profits collapsed, and the balance sheet has been weak. The company also admitted that attempting to diversify hadn’t worked, (“Diworseification” as Peter Lynch would call it) and that it will be going back to focusing on Creative Management Solutions (CMS). If you don’t know what that is – you’re not alone – but Frontier owns four of these games: Planet Coaster, Planet Zee, Jurassic World Evolution, and finally Jurassic World Evolution 2.
We know from November that all four of these games reached profitability within one month of release and had a 100 per cent return on investment within 12 months. Cumulatively, each of these games delivered more than 250 per cent return on investment. With the strategy to now release a new CMS game every year for the next three years, it’s clear that the board believes going back to what it was doing originally is the better strategy.
They could be right. But it seems that the future of the business hinges on the next three games it produces, and any flop is going to materially affect the company’s cash flows and balance sheet.
However, news this week of an update on the business reported that it was trading in line with expectations and that the cash position had increased to £23.4mn up from £19.9mn as of 31 December 2023.
This now means that at a market cap of £64mn the cash position is now over a third of the market cap, and quells any fears of an emergency placing. And with the three new games coming that are the type that Frontier does best, it could be that the narrative is switching that this is no longer a company in distress but a low valued company in terms of enterprise value to sales.
Moving down to Chart 2, the recent price action shows a base, yet with the stock up 50 per cent in a few weeks, I’d want to see this consolidate further. Keep on watchlist.
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