Tuesday, July 23, 2013

London's AIM - IPO Activity - H1 2013

IPO activity on the London Stock Exchange's AIM held steady during the first half of 2013 with 22 listings on London's AIM, four of which have their main place of operation in the U.S.  Gross capital raised amounted to £258 million ($400 million).  Six London AIM IPOs included meaningful liquidity events for Selling Shareholders, two of which were from the U.S.

While 12 of the 22 companies listing on London's AIM generated revenues > £2 million, which is consistent with the first half of 2012, only three companies listing on London's AIM earned profits > £1 million, compared to 10 of 22 during the first half of 2012.  This indicates a willingness on the part of London AIM investors to bear more risk.

This post provides insight into each of the 22 companies listed on the London Stock Exchange's AIM; the industries and geographies in which they operate, their overall listing, financial and operating metrics and the outlook for London AIM IPOs.

Highlights

  • IPO activity on the London Stock Exchange's AIM holds steady - 22 AIM IPOs during the first half of 2013 
    • Companies completing London AIM IPOs since 2010 require less capital and are stronger
  • £258 million ($400 million) raised for London AIM IPOs in H1 2013 (£1.1 billion for secondary offerings on London's AIM)
  • London AIM IPO market remains selective, therefore, prospective issuers should carefully consider:
    • Suitability before embarking on the process of listing on London's AIM
    •  Key advisers, most notably London AIM Nominated Advisers (Nomads) and London AIM Nominated Brokers
  • Average London AIM IPO raised £11.7 million ($18.1 million)
    • At a cost of £1.4 million ($2.2 million) or 12% of the gross funds raised on London's AIM
  • 59% of London AIM IPOs raised between £3 million and £15 million ($5 million and $23 million)
  • Average opening market capitalization on London Stock Exchange's AIM of £29 million ($45 million)
  • London AIM IPO dilution of existing shareholders, ex-Investing Companies, amounted to 25%
  • Average post-IPO free float on London's AIM of 47%
  • Average and median share price return on London's AIM of 20% and 9% since London AIM IPO (median date 5/8/13)
    • FTSE AIM All-Share Index fell 2% during H1 2013 and 3% from 5/8 - 6/30/13
  • 12 of the 22 companies listed on London Stock Exchange's AIM generated revenues > £2 million (range £2 million - £67 million)
    • Median trailing pre-money revenue multiple of 1.98
    • Those w/o significant revenues broadly in the oil and gas sector or financials
  • Only 3 of the 22 companies listed on London's AIM earned profits > £1 million (range £1 million - £2 million)
    • Indicates London AIM investor willingness to bear more risk compared to 2010 - 2012
    • Median trailing pre-money P/E ratio and EBITDA multiple of 10.57 and 7.89
  • Industry dispersion and insight into the 22 companies listed on London's AIM below
  • Geographic dispersion and related commentary on the 22 companies listed on London's AIM below as well

The table below shows that IPO activity on London Stock Exchange's AIM during the first half of 2013 was consistent with first half activity on London's AIM in recent years.  Looking across the last seven half-years, it is easy to spot the second half seasonality of London AIM IPOs, which QE2 exacerbated during 2010.  Generally speaking, compared to 2010, the companies that listed on London's AIM during 2011, 2012 and the first half of 2013 were stronger and simply required less growth capital.



Number of London AIM IPOs
Gross Funds Raised
(in £ millions)
Average Funds Raised
(in £ millions)
H1 2010
  16
   351
22
H2 2010
  30
   666
22
H1 2011
  19
   265
14
H2 2011
  26
   295
11
H1 2012
  22
   200
  9
H2 2012
  23
   495
22
H1 2013
  22
   258
12
Total
158
2,530
16

Despite the relatively weak macroeconomic situation, the Secondary Offering market on London's AIM has been strong with £1.1 billion ($1.7 billion) raised during the first half of 2013 on London's AIM as a result of attractive valuations for companies listed on London's AIM that are ‘known quantities’.  The health of the Secondary Offering market on London's AIM is a positive sign for London AIM IPOs over the medium to longer term as London Stock Exchange AIM investors remain confident in the market.

The types of companies that listed on London's AIM during the first half of 2013 generally fell into three categories; those with significant revenues, Investing Companies seeking to acquire or invest in companies/assets and oil and gas plays at a very nascent stage.  Investing Companies are typically backed by ‘known figures’ with a history of achieving returns.  The oil and gas companies listed on London's AIM all had owned or identifiable assets, solid geological studies and exceptional management teams with track records of success.

The chart below provides the distribution of gross funds raised from London AIM IPOs during the first half of 2013.  The sweet spot for London AIM IPOs is between £3 million ($5 million) and £15 million ($23 million).
 

Of the aggregate gross funds raised on the London Stock Exchange's AIM, 93% was for the companies listed on London's AIM and 7% was for selling shareholders, which were present in seven of the London AIM IPOs, although, only six sold a meaningful stake.  While the average amount of gross capital raised on London's AIM was £12 million ($19 million), the median was only £4 million ($6 million).
The equation below can be used to predict the cost of a London AIM IPO with 83% confidence.  The 11 data points represent the gross funds raised on the London Stock Exchange's AIM and associated costs for the non-Investing Company London AIM IPOs that raised at least £3 million ($5 million).  Since the average non-Investing Company that raised at least £3 million ($5 million) raised £11.7 million ($18.1 million), the expected cost would be £1.43 million ($2.22 million) or 12% of the gross funds raised.
 

The average and median offering costs for all 22 London Stock Exchange AIM IPOs amounted to 21% and 14%, respectively, of the gross funds raised on London's AIM, however, the average, in particular, is skewed by a number of relatively small London AIM IPOs where the fixed costs dominate.

The chart below provides the distribution of opening market capitalizations on London's AIM.  The average company’s opening market capitalization on the London Stock Exchange's AIM was £29 million ($45 million) whereas the median was £14 million ($22 million).
 

The aggregate opening market capitalization of the 22 companies that completed IPOs on London's AIM during the first half of 2013 was £0.6 billion ($0.9 billion).  The average and median post-IPO free float of these companies listed on London's AIM was 47% and 42%, respectively.

The chart below highlights an interesting shift in the market with respect to the London Stock Exchange's AIM IPO dilution of existing shareholders.  There are two main reasons for this shift; one regulatory and the other macroeconomic.  The regulatory reason is the London Stock Exchange’s codification of the London AIM Nominated Advisers (Nomads) Rules in 2007, which increased the scrutiny of prospective new companies listing on London's AIM by Nominated Advisers (Nomads) since the Nominated Adviser (Nomad) vouches to the London Stock Exchange (LSE) as to a company’s suitability for listing on London's AIM.  The macroeconomic reason is the global financial crisis, which has caused London AIM investors to become more risk adverse.  Consequently, the strength of the companies listing on London's AIM has increased and, as a result, the London AIM IPO dilution of existing shareholders has decreased.
 

The final chart in this section provides the distribution of share price returns on London's AIM since each of the 22 companies listed on London's AIM through June 30, 2013.  It should be noted that the median London AIM IPO date is May 8, 2013, therefore, the average and median returns on London's AIM of +20% and +9%, respectively, only represent, on average, the last 54 days of the first half of 2013.  As a point-of-reference, the FTSE AIM All-Share Index fell 2% during the first half of 2013 and 3% from May 8, 2013 through June 30, 2013; therefore, the relative performance of the 22 London Stock Exchange AIM IPOs has been quite strong.
 

London AIM Industry Dispersion and Revenue and Profitability Profile
Companies listed on the London Stock Exchange's AIM are organized into 90 sub sectors, which feed into 40 sectors, which feed into 10 super sectors.  The only super sectors that were not represented with London AIM IPOs during the first half of 2013 were Telecommunications and Utilities.  The chart below illustrates the eight super sectors in which London Stock Exchange AIM IPOs occurred during the first half of 2013.  Since the classifications can be deceptive, the table below the chart provides some insight into the individual companies.

 
     
Financials (5)
One intends to invest in private SMEs in the U.K. healthcare sector, one intends to invest in Southeast Asian (Malaysia, Thailand, Indonesia and Myanmar) companies operating in the agriculture, forestry and plantation, mining, natural resources, property and/or technology sectors, one intends to invest in listed preferred shares of South Korean companies, one intends to invest in the oil and gas logistics support industry in sub-Saharan Africa and one intends to invest in businesses operating in or with business exposure to Myanmar
Industrials (4)
One designs, manufactures and supplies advanced testing and measurement products for vehicle suspension, brakes and steering, both in the laboratory and on the test-track, to the global automotive industry, one manufacturers mineral wool products for the construction industry used in thermal and acoustic insulation, one is a security and risk management consultancy providing business and security intelligence, political risk and security consultancy, crisis resolution, physical security and blast protection products and one provides voice-based contact center services and other BPO solutions
Technology (3)
One develops wireless solutions for the remote tracking, monitoring and protection of assets and people, one designs and manufactures hardware and software solutions for the pay-for-play gaming and slot machine industry and one is a pure-play provider of cloud-based IT and communications services
Healthcare (3)
One has developed a physiological monitoring technology product (worn as a patch on the body, with software applications and cloud-based infrastructure) for the professional sports, consumer wellbeing and weight-loss market, one is a medical device company that designs, develops and commercializes a range of non-invasive neurodiagnostic hardware and software products used to monitor and interpret brain activity and one develops and commercializes computerized neuropsychological tests, including those enabling the early detection of dementia
Oil & Gas /
Alternative Energy (3)
One is focused on onshore oil where new technologies and techniques have re-opened the play, one is focused on onshore conventional and unconventional oil and gas and one is focused on offshore oil and gas
Consumer Services (2)
One provides outsourced online customer acquisition solutions to large, consumer-facing organizations and the other is a digital media content provider that exploits intellectual property rights around music and video by acquiring nostalgic content and then digitizing it before recompiling and delivering the digital music and video content, via its aggregator, to over 600 online digital stores
Consumer Goods (1)
This company is completing the construction of a 60 ton per hour palm oil extraction mill
Basic Materials (1)
This company develops micro-porous metals for thermal management used in cooling systems for central processing units in high performance workstations (engineering, science, CGI, animation), computer clusters, supercomputing infrastructure and data centers

Of the 22 companies listed on the London Stock Exchange's AIM, 12 generated significant revenues (i.e. > £2 million) during their most recent financial year with the range being £2 million - £67 million ($3 million - $104 million).  The average pre-money revenue multiple achieved on London's AIM was 2.23 and the median was 1.98.  Of the 12 companies listed on London's AIM that generated significant revenues, only three earned significant profits (i.e. > £1 million), with the range being £1 million - £2 million ($2 million - $3 million), five earned small profits (i.e. < £1 million), three recorded small losses (i.e. < £3 million) and one recorded a large loss of £10 million.  The average pre-money P/E ratio and EBITDA multiple achieved on the London Stock Exchange's AIM for the three companies listed on London's AIM that earned significant profits was 18.28 and 11.80, respectively, and the medians were 10.57 and 7.89.

As previously noted, the types of companies that completed London Stock Exchange AIM IPOs during the first half of 2013 generally fell into three categories; those with significant revenues, Investing Companies listing on London's AIM seeking to acquire or invest in companies/assets and oil and gas plays at a very nascent stage.  As such, none of the five financial companies listed on London's AIM, none of the three oil and gas companies listed on London's AIM or the consumer goods company (palm oil) listed on the London Stock Exchange's AIM generated significant revenues.

Across the other super sectors, all four industrial companies listed on London's AIM generated significant revenues but only one earned significant profits with one earning a small profit and the other two recording small losses.  All three technology companies listed on the London Stock Exchange's AIM generated significant revenues but only one earned significant profits with one earning a small profit and the other recording a large loss.  Two of the three healthcare companies listed on the London Stock Exchange's AIM generated significant revenues but neither earned significant profits with one earning a small profit and the other recording a small loss.  Both consumer services companies listed on London's AIM generated significant revenues; one earned significant profits and the other earned a small profit.  The basic materials company listed on the London Stock Exchange's AIM generated significant revenues but only earned a small profit.

None of the 22 companies listed on London's AIM completed their London AIM IPOs via the ‘fast track route to London's AIM’, where their securities were traded on a London AIM Designated Market (ADM) for at least the previous 18 months.  So as to place this in the proper context, only four of the 136 London Stock Exchange AIM IPOs from 2010 - 2012 utilized the fast track route, all with the Australian Securities Exchange (ASX) as the ADM.  Companies listing on London's AIM utilizing the fast track route do not have to produce the typical London AIM Admission Document but rather a brief, but detailed, pre-admission announcement.  The 10 ADMs are the top tier markets of the ASX, Deutsche Börse Group, Johannesburg Stock Exchange, NASDAQ, NYSE, NYSE Euronext, NASDAQ OMX Stockholm, Swiss Exchange, TMX Group and UKLA Official List.

The migration of companies to the London Stock Exchange's AIM from the ICAP Securities & Derivatives Exchange (ISDX, formerly the PLUS Stock Exchange and formerly OFEX) in the U.K. continues to slow with only two of the 22 companies listed on London's AIM that completed IPOs on London's AIM during the first half of 2013 having been previously listed on ISDX, whereas 15 of the 136 London Stock Exchange AIM IPOs from 2010 - 2012 were of companies previously listed on ISDX.

Other points of note during the first half of 2013 are one London AIM IPO of a company transferring from the London Stock Exchange’s Main Market to London's AIM and one London AIM IPO of a company that was, and still is, traded on the TSX Venture Exchange (Toronto), which is not an AIM Designated Market, with a simultaneous third listing on the Enterprise Securities Market of the Irish Stock Exchange.

Of the four U.S. companies listed on London's AIM that completed IPOs on London's AIM during the first half of 2013, one remained domiciled in the U.S., one re-domiciled into Bermuda, one re-domiciled into the U.K. and the other was already domiciled in BVI.  The U.S. domiciled company listed on London's AIM could have continued to prepare its financial statements in U.S. GAAP, however, they chose to report using IFRS.  The company listed on the London Stock Exchange's AIM that re-domiciled into Bermuda, which allows for the use of any internationally recognized GAAP, continues to report using U.S. GAAP.  The company listed on London's AIM that re-domiciled into the U.K. must report using IFRS.  The company listed on London's AIM that was already domiciled in BVI, and was previously listed on ISDX since June 2011, continued to report using IFRS.  In terms of reporting currencies, all four U.S. companies listed on London's AIM use the USD.

London AIM Geographic Dispersion (Main Place of Operation) and Revenue and Profitability Profile
Unsurprisingly, the U.K. is the main place of operation for more London AIM-listed companies than any other country or continent; however, the dominance of U.K. companies listed on London's AIM has continued to shrink in recent years.  While approximately 60% of the 1,100 companies listed on London's AIM are based in the U.K., only 41% of the London AIM IPOs during the first half of 2013 and 31% from 2010 - 2012 were for U.K. companies.  In stark contrast to previous years, London AIM investors are demanding that even U.K. companies listing on London's AIM generate significant revenues, with eight of the nine meeting this test during the first half of 2013.  Of those eight U.K. companies listing on London's AIM, however, only two earned significant profits with three earning small profits, two recording small losses and one recording a large loss.

The bar has always been set a bit higher for companies listing on London's AIM from outside the U.K., with the historical exception of Continental Europe, although it is notable during the first half of 2013 that while 12 of the 22 companies listing on London's AIM generated significant revenues, only three earned significant profits.  This indicates London AIM investor willingness bear more risk compared to 2010 - 2012, although, there are not enough data points from which to draw a firm conclusion.

Of the four U.S. companies listed on the London Stock Exchange's AIM, three generated significant revenues (£8 million, £13 million and £67 million) with one earning significant profits (£1 million) one earning a small profit and the other recording a small loss.  Across the other geographies, only the Israeli company listed on London's AIM generated significant revenues (£4 million) but only earned a small profit.

In terms of industry sectors, the U.K. companies listed on the London Stock Exchange's AIM are clustered in industrials and technology, the U.S. companies listed on London's AIM are spread across industrials (technology), healthcare (technology), oil and gas and consumer services (technology), the Israeli company listed on London's AIM is a technology concern and the other geographies consist mainly of Investing Companies and oil and gas plays at very nascent stages.

 

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