Aimzine is a FREE online magazine for investors and everyone involved with AIM companies. If you are not already registered to read Aimzine please click HERE

In this regular slot Ash Mehta provides an inside view of what’s happening in the City and how it affects you the private investor.

Slice and Dice

Segmenting the AIM market would help good companies make their MARK

This month I attended the Growth Company Investor Show held by Vitesse Media at the Barbican. Despite the tube strike and thundery showers, there was a good turnout which indicates that perhaps people are turning their attention to AIM stocks again. This seems to be backed up by the latest reports of soaring trading volumes being recorded by execution-only brokers, with one firm describing the increase as being like the “return of the day trader” and another claiming a year on year increase of 66% in trading volumes.

At the show I had the pleasure of sitting on a panel with some serious heavyweights, including the Spectator’s financial columnist Richard Northedge, to discuss “Picking the Winners”. One of the questions from the audience was about how we distil the 1,500 or so AIM stocks down to a list that we then do some research on. The response from each panel member generally related to sectors that they favoured or avoided (in my case pre-revenue natural resources companies!).  

This prompted me to consider again a question that has gone around City circles for many years and been asked repeatedly since the massive growth of AIM to, at its peak, around 1,700 companies. How do you segment AIM companies to find the ones to research when there are so many to look at? The question has never resulted in a conclusion because any proposal, whilst being of assistance to stock pickers, will also have some flaws.

Proposals have included a splitting of the AIM list into league tables based on market capitalisation. However, whilst this works for well established companies in the FTSE100 and FTSE 350, a league table for small cap stocks could potentially accentuate problems for small but well run companies which may have an inappropriately low market capitalisation for some inexplicable reason.

I spoke to a City contact who worked in the AIM team in its early years, and was instrumental in its growth over that period, who talked me through a range of bases that might be used but emphasised that the Exchange’s view was that investors would segment the AIM market as they saw fit using their own criteria and that it wasn’t the role of the exchange to do so. This is a view that the current AIM team seems to concur with. With the advent of numerous sophisticated software tools over the last ten years and many free search tools available on the internet, investors can indeed now run their own search criteria to create shortlists.

However, this doesn’t get around the fact that many companies coming to AIM don’t use their listing effectively and that many investors segment the AIM market on just two criteria; sector and market capitalisation. Neither of these, of course, tells you anything about the success of the underlying business. There are many companies with large market caps you wouldn’t want to invest in and many companies with smaller market caps that could be good investments.

investors would segment

the AIM market as they saw fit using their own criteria

So, what’s the answer? Well there isn’t one without flaws, and some companies will consider it unfair whatever new segmentation was introduced.

My proposal would be to have segmentation based on the reasons why businesses are set up ie. to generate revenues, produce profits and pay dividends. Clearly some companies are set up by founders with no expectation of generating profits (let alone paying dividends) before they are taken over, but for the large part these three objectives are the reasons why businesses are set up by entrepreneurs. In which case, why not have the AIM market segmented into four (following the stock exchange’s use of the suffix “Mark” eg. TechMARK, LandMARK):

• AIM DividendMARK (those paying a regular dividend)
• AIM ProfitMARK (those generating a regular profit)
• AIM RevenueMARK (those generating revenues) and
• AIM Fledgling (ie. pre-revenue).

So what's the answer? 

....Well there isn't one

without flaws

This would not only be a helpful segmentation from an investor perspective but may also encourage management teams to prepare plans and milestones to ensure their companies move up from one MARK to the next. It could also help nominated advisers to ask the right questions to avoid companies coming to AIM and then becoming effectively moribund as many quoted companies floated in the last five years have become. It would also segment the market in a way not hitherto seen. Large companies if they were pre-revenue would appear in the lower segment whilst smaller companies if generating revenues and perhaps heading towards a sustainable profit would appear in higher indices.

Obviously, there would need to be detailed rules over how this would be implemented, with provisions to avoid companies generating nominal revenues from non core businesses or paying trifling dividends just to qualify for a particular MARK, and also provisions for consistency as well as transition phases in the case of companies moving from one MARK to another. Becoming part of the AIM DividendMARK would be the pinnacle of the indices, and companies aiming for this MARK would also discover the benefits of having the financial discipline of paying a regular and progressive dividend, along with the increased visibility that membership of such a segment would bring.

No system is prefect but, all in all, at a time when the AIM team is looking to encourage AIM companies to make better use of their quoted existence this segmentation would provide a welcome incentive to companies make their MARK by moving towards revenues, profits and dividends: good for shareholders, companies, investors and ultimately good for the AIM market and the London Stock Exchange as a whole.

..it could also help

nominated advisors to

ask the right questions

Discuss this article

on Aimzine Social

ash@orchardgrowth.com

Ash Mehta is Chief Executive of Orchard Growth Partners which provides Finance Director consultancy services. He is also part-time Finance Director of Northbridge Industrial Services plc, an AIM-quoted hire company, and he sits on the Executive Committee of the Quoted Companies Alliance, the representative body for smaller quoted companies. The views expressed are his own and do not necessarily represent the views of those organisations or of Aimzine Ltd.

 © Ash Mehta

RETURN TO AIMZINE NEWSLETTER HOME | July 2009