Aim-traded shares that hit the target

However, there is scope for further upside because the shares still only trade on a 2020 price/earnings (PE) ratio of 10, a third less than the market average, even though the directors’ reported a robust outlook statement in a pre-close trading update which also confirmed the company’s ninth consecutive year of profit growth. I anticipated as much when I last advised buying the shares, at 79p, when I covered the interim results (‘Mission’s major client wins points to prosperous 2020’, 9 September 2019).

Indeed, that rating is modest for a business winning major new accounts, boasting a high retention rate of existing ones, and producing substantial free cash flow. Importantly, Mission Group can comfortably pay down all of the £9.1m outstanding obligations on past acquisitions, and invest in organic growth initiatives, too. The company should be debt free by the year-end. The hefty share price gains aside, shareholders are being rewarded with a progressive payout policy. The prospective dividend yield is 2.5 per cent. Ahead of the annual results on Wednesday, 1 April 2020, I am upgrading my target price to 120p.

Aim-traded IXICO (IXI:85p), a London-based company that uses proprietary artificial intelligence (AI) software algorithms to analyse images from brain scans, has delivered a 157 per cent share price gain since I spotted its potential last summer ('Alpha Company Research: Simon Thompson spies opportunity in cutting edge technology', 23 July 2019). The share price is up 25 per cent since my last article (‘Playing an earnings upgrade cycle’, 12 December 2019), buoyed by news of a £1.8m extension to a Phase III study in Huntington's Disease, and a £0.6m extension to a study programme in Progressive Supranuclear Palsy.

I really like the company and feel that if IXICO continues to win new contracts then analysts will be forced again to push through more earnings upgrades given the operational leverage of the business. However, as it stands right now, the shares trade on 32 times cash adjusted net profit estimates for the 2020/21 financial year and have hit my 85p target price. Take profits.

Frontier IP (FIPP:65.5p) provides a range of commercialisation services to university spin-outs in return for ‘free equity’ stakes rather than actually investing cash. The focus is on validating the technology and, through early industry engagement, understanding how it can be scaled up and what market demands are being met. Frontier has been highly successful, having posted six consecutive years of pre-tax profits, one reason why the Aim-traded shares made it onto my buy list at 56p (Alpha Company Research: ‘A differentiated IP play’, 15 November 2019). I also noted that its largest holding is a 3.25 per cent stake in Exscientia, one of the world's leading artificial intelligence-driven drug discovery companies. 

In 2019, Exscienta raised $26m (£20m) through a Series B funding round, signed new drug discovery collaboration agreements with Roche, and entered into a partnership with an exciting early-stage biopharmaceutical company Rallybio. In addition, Exscienta has collaborations with Celgene, GSK, Roche, Sanofi, GT Apeiron, and Evotec, highlighting the value drug giants attribute to its patented cutting edge Centaur Chemist AI drug delivery platform that helps them to discover pre-clinical drug candidates. In aggregate, these collaborations have upfront and potential milestone payments of £320m. Furthermore, Exscentia has just announced a collaboration agreement with Bayer AG. Focused on cardiovascular disease and oncology, the latest collaboration could generate €240m (£200m) in upfront and research payments, and clinical milestones.

The point being that Frontier’s shareholding in Exscentia was only valued at £5.16m in the company’s 2019 annual accounts, implying an equity valuation of £159m. However, management note that they “have exercised a degree of caution” in the valuation. That’s quite some understatement given that Benevolent AI, Exscientia’s direct competitor and a similar-sized company, raised £109.5m of new funds last autumn at an equity valuation of £1.4bn.

Moreover, Frontier has announced a raft of positive news flow on other investee companies, too, all of which are highly supportive of the investment case. Rated on a modest 1.5 times conservative book value, and reflecting the fact that the value embedded in the Exscentia stake could ultimately be worth Frontier’s current market capitalisation of £33m, I am upgrading my target price from 80p to 100p. Buy.

Aim de-listings hit small investors

A large number of small-cap companies have been voluntarily cancelling their Aim listings, a trend that is hardly a positive step for London junior’s market. It comes at a time when there has been a paucity of new listings and takeover activity is rife, so further acerbating the shrinkage in the number of Aim-traded companies.

To put this trend into perspective, 82 companies departed Aim in 2019, a hefty number in relation to the 922 Aim-traded companies at the start of 2019, and dwarfing the 23 new listings which raised £489m of new money between them. Of the companies cancelling their listing, 26 were acquired, three moved up to the Main Market and six were reverse takeovers. A further eight Aim-traded companies were in live bid situations at the year-end.

I was at the sharp end of the bid activity as 10 of the 26 takeovers were companies on my active watchlist including software companies Scisys and Sanderson, IFA Lighthouse, and Caribbean luxury hotel chain Elegant Hotels. Corporate activity is part and parcel of the stock market especially in the small-cap space as private equity firms (accounting for eight of the acquisitions in 2019) and larger rivals prey on the minnows. Takeovers can produce hefty returns for shareholders, too: Allenby Capital, an advisor to 50 Aim-traded companies, calculates that the average bid premium last year was 52 per cent with a median bid premium of 28 per cent. My own experience backs this up.

However, that still means that well over half the 82 companies exiting the London junior market did so for reasons other than mergers & acquisition (M&A) activity or promotion to the Main Market. Of these companies, 26 chose to de-list voluntarily, three were forced to de-list, seven went into administration, and eight failed to find a nominated advisor, a prerequisite of maintaining a listing, so had to de-list.

Furthermore, if anything the unscheduled cancellations of Aim listings has picked up since the autumn. Of the 15 companies cancelling their listing in January, only eight de-listings were a result of reverse takeovers or M&A activity. Ten of the 21 companies exiting Aim in the fourth quarter either did so voluntarily or were forced to de-list. 

I have not been immune to this trend as one of my recommendations, investment bank Shore Capital, delisted its shares in November. Reasons given by the directors for doing so were a mispricing of the company's equity due to a lack of liquidity, evidenced by the substantial share price discount to net asset value (NAV), and the disproportionate cost and management time associated with maintaining the Aim admission.

Importantly, Shore Capital still retained its listing on the Bermuda Stock Exchange (SGR.BH – 155p), a designated recognised stock exchange, thus enabling shareholders to maintain their shareholdings in their ISA wrappers, and providing them with a facility to continue dealing in the shares. Furthermore, the directors have substantial shareholdings themselves, controlling 67 per cent of the issued share capital, having increased their holdings from 53 per cent since 2017, a strong sign of their confidence in the future prospects of the business and reinforcing their view that the equity is mispriced.

In the circumstances, although Shore Capital’s share price remains 15 per cent under water (after taking into account dividends) since I included the shares in my 2018 Bargain Shares Portfolio, I still believe there is re-rating potential despite the lack of an Aim listing (‘A mandate for value creating’, 30 September 2019). The shares offer a dividend yield of 7 per cent, are rated on a 12-month rolling price/earnings (PE) ratio of 10, and NAV of £67m is double the market capitalisation of £33m even though Shore Capital holds £22.5m of cash, gilts and quoted equities.

MXC Capital’s announces de-listing

MXC Capital (MXCP:63.5p), a £39m market capitalisation technology-focused merchant bank that backs investee companies it represents, is the latest company to announce plans to cancel its Aim listing. The directors have no plans to list the shares on any other designated recognised stock exchange, thus materially impacting liquidity which has led to a hefty share price fall.

MXC’s shares are trading on a deep discount to net asset (NAV) as I highlighted when I suggested buying, at 90p, last autumn (‘MXC’s valuation anomaly worth exploiting’, 2 September 2019). The directors make the point that at the end of the 2017, 2018 and 2019 financial years, the respective share price discount to NAV ranged between 22 and 33 per cent, meaning that shareholders can only exit by selling out their interest in the company below the underlying value of the assets held. The board also notes limited on-market trading activity and liquidity in the shares.

However, rather than trying to narrow the share price discount to NAV by making open market purchases in order to exploit the lower liquidity in the shares – Aim-traded investment company BP Marsh & Partners (BPM), a company I have successfully followed for many years, has done so to great effect – MXC’s board have decided that it’s simply not worth maintaining the Aim listing and incurring £300,000 in annual costs.

It’s incredibly frustrating as MXC is debt free and has substantial assets including proforma net funds of £11.3m; investments worth £20.6m in private companies and joint ventures; loan receivables of £12.2m; equity stakes worth a combined £7.2m in two listed software companies, IDE (IDE:3.75p) and CloudCoCo (CLCO:1p); and a 75 per cent stake in its transactional business, having sold a 25 per cent stake last year for £2.25m to Ravenscroft, a Channel-Islands-based investment services group. My spot NAV per share estimate of 103p is 62 per cent higher than MXC’s current share price, albeit it is down from 117p at 31 August 2019 due to share price reversals for both IDE and CloudCo.

Following the proposed Aim cancellation, MXC’s board, who control 15.9 per cent of the 62m shares in issue, plan to: continue investing in technology companies and return 50 per cent of the proceeds on future exits through a tender offer pitched at the company’s NAV at the time; at their discretion buy-back shares at a discount to NAV; establish a matched bargain settlement facility to facilitate buying and selling the shares, details of which will be provided in due course; and exit all the company’s investments within five years, at which point the company will be wound up.

Of course, MXC’s board could do all of that without sacrificing the company’s Aim listing. However, as other shareholders owning 51 per cent of the shares intend to back the cancellation at the forthcoming general meeting on Monday, 2 March 2020, this means that a Concert Party (including the directors’ interests) control two thirds of the shares in issue, so are highly likely to achieve the 75 per cent of votes required to cancel the Aim admission.

This leaves smaller shareholders with the unappealing prospect of either selling out at the artificially depressed market price ahead of a likely cancellation of the Aim listing on Friday, 13 March 2020, or holding shares in an unlisted investment company for the next five years. The option of tendering your shares back to the company now is not an option. The Hobson’s choice faced by small retail investors really doesn’t put London’s junior market in a good light at all. In the circumstances, it’s best to sell.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

Special offer: Both books can be purchased for the special price of £25 plus discounted postage and packaging of only £3.95. The books include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential, too. Details of the content of both books can be viewed on www.ypdbooks.com.

Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.