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Giles Hargreave: my top five AIM stocks
by James Phillipps on Oct 23, 2013 at 13:31
Marlborough's Citywire AA-rated star shares highlights five AIM minnows he believes have the potential to achieve great things.
Giles Hargreave believes AIM is providing bountiful opportunities and its appeal is broadening after the tax planning advantages of holding stock listed on the market were extended earlier this year.
The AA-rated co-manager of the Marlborough UK Micro Cap Growth fund, said he is finding smaller, faster-growing companies listed.
‘An improving macroeconomic environment and low interest rates are combining to create highly favourable conditions for the young and growing companies on AIM at the same time as the government is increasing tax breaks for investors in the UK’s junior market,’ Hargreave said.
‘The tax planning advantages of AIM stocks – qualifying shares are exempt from inheritance tax (IHT) after they have been held for two years – were strengthened on 5 August when they were made ISA-allowable. Between that date and 1 October the AIM index rose 9.7%, while the FTSE All Share retreated 1.7% and the FTSE 100 was down 2%.
‘Investors will be given a further incentive to invest in the junior market from April, when Stamp Duty will no longer be applied to purchases of AIM stocks.
‘These tax breaks and the strong long-term growth potential of smaller companies are a powerful combination and it seems to me there is a growing realisation among investors of the potential offered by AIM. This has been mirrored by an increase in the number of companies choosing to list on it.
‘Naturally a market for fledgling companies carries more risk and these stocks are not for the casual investor, but I think there is good reason to be bullish on the long-term prospects for quality AIM stocks of the type in which we invest.’
Dart Group (DTG.L)
Dart Group’s strong growth is largely due to the performance of its package holiday business Jet2holidays.com, which since launch in 2007 has expanded to become the third largest tour operator in the UK.
‘In the year to the end of March, the company flew nearly 420,000 holidaymakers from eight airports in the North of England, the Midlands, Scotland and Northern Ireland to destinations in the Mediterranean, Canary Islands and European cities. The management believe it is on course to double that figure in the current financial year.
‘In most cases holidaymakers fly on planes from sister company airline Jet2.com. Owning most of the planes used and its established relationships with hotel owners put the company in a strong position and there are significant barriers to entry for potential competitors.
‘Alongside the package holiday and airline businesses, Dart operates Fowler Welch, a distribution and logistics business with more than 450 vehicles serving the food industry.
‘Dart’s shares are, at the time of writing, up more than 230% over one year but we believe this is a stock with further to go.’
‘Prezzo is a growing restaurant business and very well positioned to reap the benefits of returning consumer confidence. The company operates more than 200 Italian restaurants under the Prezzo brand and is rolling out two new concepts: Mexican-themed Chimichanga and Cleaver, which focuses on chicken and ribs.
‘The company is not burdened with debt and has strong cash flow, which it is using to finance the expansion programme.
‘Half-year results to the end of June showed adjusted pre-tax profits up 12% to £8.5 million and although the shares have dropped back recently after directors sold several million pounds’ worth, we do not see this as a cause for concern. We expect Prezzo to continue to perform strongly for investors as it continues to grow.’
‘Restore provides document management services to clients including many of the UK’s top law firms as well as banks, councils and hospital trusts.
‘Documents ranging from files and deeds to patient records and X-rays are stored at secure sites around the country, including a 70-acre underground facility in Wiltshire.
‘Restore has high visibility of earnings because much of its business is based on long-term contracts and it is achieving strong growth: adjusted profit before tax for the first six months of this year was £4.1 million, which is up 95% on the same period last year.
‘The company has an excellent management team and in addition to document storage provides secure shredding, computer data and hardware destruction and office relocation services.’
Fairpoint Group (FRPG.L)
‘Fairpoint Group has established itself as the market leader in the provision of debt management services such as Individual Voluntary Arrangements (IVAs) and debt management plans (DMPs), under which people who have run into financial trouble repay creditors in part or in full through a programme of regular payments.
‘The company has more than 24,000 IVAs under management as well as 15,000 DMPs and an important part of its proposition is the no-obligation advice service it provides to around 130,000 people each year.
‘Fairpoint is cutting costs and growing market share. It has already made three acquisitions so far in 2013, which have been funded from cash flow. Adjusted profits for the first half of this year were up 6% compared to the same period in 2012 and with a net cash balance of £2.8 million the management are planning investment for further growth.
‘Fairpoint has already branched out into claims management and plans to continue with its strategy of diversification.’
M&C Saatchi (SAA.L)
‘The advertising agency set up by Maurice and Charles Saatchi after they were ousted from Saatchi & Saatchi attracted plenty of attention recently with its stunt involving a submarine apparently surfacing in a Milan street and this underlined the fact that the group is now very much a global operation, with 26 offices in 18 countries worldwide.
‘In the UK, it has been behind a number of high profile recent campaigns including the NHS’s ‘Change 4 Life’ and Transport for London’s ‘Keeping London Moving’ and has recently won new contracts with Adidas and Land Rover.
‘Profits before tax for the first half of this year were up 6% to £9.3 million and a number of businesses within the group that have been losing money are on course to move into profit by the end of the year. The share price is, as I speak, up 70% over 12 months.
‘What we particularly like about M&C Saatchi, and what sets it apart from rivals, is the way it offers new talent coming on board a significant equity stake in the business they work for, which is proving a very effective incentive. All in all it is a company we like very much.’
Hargreave will be hoping these five picks will help him maintain his stunning run, where he has not held a Citywire ratings for only three months over the last decade. More recently he has delivered 61.3% over three years, averaged across his Marlborough Special Situations and UK Micro Cap Growth funds, compared to the average small cap managers’ 46.9%.