Today, I’m running the rule over three Alternative Investment Market (AIM) newcomers. Could these three companies prove to be winning investments for early birds?
Hotel Chocolat
Admission to AIM: 10 May — Placing price: 148p — Market cap at admission: £167m
Hotel Chocolat (LSE: HOTC) was founded in 1993 by Angus Thirlwell and Peter Harris, and has traded under the Hotel Chocolat brand since 2003. The placing raised £9.5m net for the company and £43.5m for the founders and employee shareholders.
Mr Thirlwell (Chief Executive) and Mr Harris (Development Director) have each retained a 33.3% stake in the business, while two institutional investors have become significant shareholders by participating in the placing: Old Mutual has a 7.8% holding and small-cap specialist Hargreave Hale has 5%.
The shares climbed quickly after admission, and are currently trading at 206.5p (up 40%). This is something we often see when you get the combination of a brand that is familiar to retail investors and a relatively limited free float of shares.
At the current price, Hotel Chocolat is valued at 2.6 times trailing 12-month sales of £89.5m and 48 times net profit of £4.86m. The company has decent growth potential (and also intends to pay dividends), but the valuation looks too rich to me right now.
Morses Club
Admission to AIM: 5 May — Placing price: 108p — Market cap at admission: £140m
What was a drapery store in Swindon owned by Levi Morse over 130 years ago is today the nationwide doorstep lender Morses Club (LSE: MCL), which was built to its present scale by private equity. No new shares were issued in the placing, with the £68.5m raised being a partial cashing out by the private equity owners. So, no new funds for the company itself.
Morses flotation was well supported by institutional investors. Five have become significant shareholders, including Schroders with 9.4% and the redoubtable US outfit Soros Fund Management with 4%.
The shares are little changed from the placing price, and look reasonably valued at 1.6 times trailing 12 month sales of £90.6m and 17.6 times net profit of £7.92m. The directors also reckon the company has the ability to pay an “attractive” level of dividend.
Acquisitions are very much on the agenda as Morses seeks to be a consolidator in a fragmented sector. I’ve seen a few disasters in the past among companies pursuing such a strategy in the financial services space, so I’m a bit wary, particularly with the directors seemingly keen to further leverage the balance sheet with more debt.
Watkin Jones
Admission to AIM: 23 March — Placing price: 100p — Market cap at admission: £255m
Founded by carpenter Huw Jones in 1791, Watkin Jones (LSE: WJG) is today a construction and development company with a focus on student accommodation. Chief executive Mark Watkins Jones is the ninth generation of the family to lead the business.
Placing proceeds of £131m saw £46m going to selling shareholders and £85m paid over to two family trusts, leaving the company itself with no new funds. The family and related parties have retained a 48.5% stake in the business, and four institutional investors have become significant shareholders, headed by the quirky Miton with 4.9%.
At 109p, the shares are up a bit from the placing price, but look decent value at 1.1 times trailing 12 month sales of £244m and 10.5 times net profit from continuing operations of £26.6m. The directors also intend to pay a 4p a share dividend for the year to 30 September 2016 — a pro rata payment equating to a 6p full-year payout (6% yield at the placing price).
