A candidate for investor of the year reveals his favourite small-cap ideas.
The Alternative Investment Market (AIM) has been a double-edged sword for many private investors. It is home to a number of great and ongoing successes; companies such as ASOS (LSE: ASC) and Rockhopper Exploration (LSE: RKH), for example, have both multiplied in value over recent years, delivering stunning returns for investors. During the last recession, however, many investors in this small-cap arena were stunned in a less pleasant fashion as scores of companies delisted or simply went bust.
Amati Global Investors runs a number of managed funds and is a longstanding backer of AIM companies. Amati's small-cap venture capital trust (VCT) funds are managed by Paul Jourdan, a Cambridge PhD based in Edinburgh who's been nominated for Grant Thornton's Investor of the Year 2012 Award. VCTs are explained in detail on Amati's website, but essentially all dividends and capital gains are free of tax. There is also a 30% tax rebate (subject to your total income tax bill) if an investor participates in a subscription when the VCT raises new money.
Between its launch in 2006 and the end of last year, the Amati VCT has outperformed its benchmark (AIM All-Share, with dividends reinvested) by 35%. The fund is growth-oriented and looks to identify companies that can achieve sustainable expansion that outstrips the wider economy. The risk with such growth investing is that, if a company's profits do not come through as expected, the share price can fall significantly.
I spoke recently with Paul Jourdan and asked him for five AIM-traded shares he thought investors should take a look at. Each is a significant holding in one of the funds he manages.
1. Sabien Technology
Sabien Technology (LSE: SNT) develops products that help make commercial heating systems more efficient. In particular, Sabien's M2G product addresses the inefficiency that arises when boilers are frequently switched on and off during the day, which is especially wasteful during summer months with boilers that are designed to keep a large building warm in winter. Judging from recent announcements, Sabien is clearly onto something -- the company's latest results showed sales had more than doubled. Furthermore, Sabien's contracts with large corporations and local authorities have recently taken the company into profit for the first time since joining AIM.
Sabien has a market cap today of £7m at 23p.
2. Software Radio Technology
£26m market-cap company Software Radio Technology (LSE: SRT) is an example of regulation delivering revenue. SRT manufactures electronic devices used to track and identify ships, and the product with the most exciting potential is something called the AIS Class B transceiver, which enables vessels and ports to identify each other. Recent regulations mean that a vastly increased number of ships will have to carry such a device and Software Radio Technology is positioning itself to cash in.
At the half-way stage, SRT reported a pre-tax profit up 93% to £1.2m and a net cash position of almost £3m. The potential in SRT has been recognised by Fool poster BobHellen, who has named the company as his entry into this 2012 share competition with this magnificent write-up. SRT shares currently trade at 25p.
3. Lo-Q
Queuing technology specialist Lo-Q (LSE: LOQ) has a strong following among private investors. The fact the company's share price has increased eight-fold in just over two years helps, and this rise has sound support: the company's sales and profits have increased similarly in the last five years. Lo-Q sells a clever device called a Q-Bot in theme parks around the world. Visitors use a Q-Bot to book a place on a ride without having to stand in a queue. The result is a 'win-win' for the theme park and visitors --with Lo-Q's technology, tourists don't need to spend as much time queuing for attractions, leaving more time to be spent in the shops!
Lo-Q has a market capitalisation of £34m at 198p. Paul Jourdan's enthusiasm for the company is not unique, and one well-known Fool has revealed his holding through this article, while plenty of other Fools also follow the share.
4. Brooks Macdonald
Brooks Macdonald (LSE: BRK) is one of AIM's big success stories. The firm offers a collection of financial services: asset management, employee benefits, funds, estate management, financial planning, tax expertise and so on, and has grown sales, profits and dividends year-on-year since being admitted to AIM six years ago.
Brooks now has a market capitalisation of £123m at £11 a share and the company's last reported profits were £7.3m. Management and staff collectively own 43% of the company, so their interests do seem aligned with those of shareholders. Trading at about 20 times forecast profits, it is clear that the market expects Brooks' success and growth to continue into the future. But a track record that has seen the business double in size during the last two years does speak for itself.
5. Asian Citrus
A more contentious inclusion is Chinese food producer Asian Citrus (LSE: ACHL). Chinese companies on AIM have come in for a lot of stick of late, but what distinguishes Asian Citrus from the rest is that it actually pays a dividend to shareholders. Last year the payout was 1.3p per share and, against today's 36p share price, that's an income not to be sniffed at. In fact, the dividend is three times the amount it was five years ago, and the payout is expected to continue to increase again this year.
Asian Citrus recently reported its winter orange crop yield had increased by 19%. City analysts expect the company's profits to continue to increase but ongoing concerns over Chinese businesses on AIM have hit the share price. The company trades at a low multiple of forecast profits, suggesting the shares may be cheap.
Fortunately, Asian Citrus is dual-listed on both AIM and the Hong Kong Stock Exchange, which means the £450m firm is eligible for investment within an ISA.
Summary
Dr Jourdan is one of the most respected professional small-cap fund managers around. His selections above demonstrate how vibrant and diverse today's AIM has become. What are your opinions on these five companies? Do you own any of the shares? Any thoughts can be added to this article using the comments box below.
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