The Alternative Investment Market (AIM) contains over 950 listed stocks, with an average market capitalisation of over £100m. Despite early misgivings about the quality of the market, in the last few years there has been a renaissance in market perception. AIM is now clearly the home for individual investors and fund managers looking to find the next interesting growth companies. In this blog, Phil Harris, manager of the EdenTree UK Equity Growth Fund, shares with us five of his favourite innovative AIM companies at the moment.
MORSES CLUB (MKT CAP £187M)
With a 16% market share, Morses Club is number two in the home collected credit loan market. The company has benefitted from the missteps of Provident Financial, the market leader, picking up a number of highly experienced agents critical to the lending process. The company is a classic cash compounder, in an unloved market, returning in excess of 20% on equity, despite a significantly under-levered balance sheet. The company could continue to drive returns higher, as it modestly gears up and takes advantage of current regulatory uncertainty to buy smaller competitors struggling to gain authorisation.
As well as favourable operating cash dynamics, the company is committed to paying out the majority of earnings in dividends, which we view as a rational capital allocation choice. Dividend returns of just under 5% still allow residual earnings to grow the loan receivables book at 10% per annum, giving a highly attractive total return to investors.
GLOBALDATA (MKT CAP £661M)
GlobalData is a provider of research and consulting solutions, offering its product to a range of end markets, including healthcare, consumer, financial services and energy. It was founded, and is still majority owned, by Mike Danson, a serial entrepreneur, who built up and previously sold Datamonitor to Informa for £500m. Strong underlying market growth is being complimented by operational leverage, as margins move to industry levels and by further acquisitions in adjacent verticals.
While the stock looks optically expensive, it is worth remembering the company is in a growth phase. Current operating margins are around 20%. This compares to other high-data centric businesses delivering over 30%, which we believe is a realistic medium-term target for the group, as it leverages its data into new products on a largely fixed-cost base. The recent acquisition of Research Views temporarily raised debt levels, but these should fall rapidly given the business’ high cash generative nature.
APPLEGREEN (MKT CAP £696M)
Applegreen is an operator of petrol filling stations and service with a presence in Ireland, the UK and the US. The company has grown rapidly since its 2015 IPO, building up an extensive network. The company has grown by offering competitively priced fuel and a broad retail proposition, including quality food and beverages though major brands.
It is currently completing a transformational deal to buy a majority stake in motorway service operator Welcome Break, part funded by a capital raising. Management will be putting a significant amount of new capital into the company to part fund it. While this will raise debt levels, the cash generative nature of the business means debt should fall rapidly allowing the company to increase its stake further in coming years. The company is not precluded from further deals, and one area of significant potential is the US market, where its partners own the property unlike in the UK and Ireland.
ECO ANIMAL HEALTH (MKT CAP £258M)
Eco Animal Health’s key antibiotic is Aivlosin, which is used to treat a number of diseases in pigs and poultry. The company is a major beneficiary of regulators tightening both the usage and dosing of antibiotics, due to their overuse and potential health effects. The drug is rapidly absorbed in low dosages and disappears from animals quickly as well, offering significant advantages over existing treatments. Growth is coming from a number of areas, including gaining market share though regulatory approval for new therapeutic areas and its introduction into new geographies.
The company operates a capital-light model by not owning production facilities or laboratories and outsourcing its requirements, while using distribution partners for the majority of sales. Margins are high and cash flow is strong. Its balance sheet has substantial net cash, which will be used for further related product acquisitions like its more recent move into vaccines.
SUMO GROUP (MKT CAP £230M)
Sumo is a market-leading independent video games developer with excellent long-term relationships with the world’s largest publishers, such as Microsoft and Sony, who outsource increasingly important aspects of their key games titles to the company. Not only is the games software market itself growing strongly at almost double digits, but this co-development is growing even faster. Given the multi-year nature of title development there is a high degree of order book visibility, margins are high and excellent cash flows levels derived from the client base.
By growing employee numbers, Sumo Group will overcome is greatest current constraint on growth. Further growth will come from taking a royalty on games and risk sharing with its clients rather than standard contract terms. It also produces a limited number of its own games to maintain low-staff attrition rates, offering a financial upside in games they have developed. A strong balance sheet gives it the opportunity to deepen its relationships with customers by acquiring and providing further complimentary services.