London’s junior market doesn’t always receive the best press. Founded more than two decades ago, Aim was supposed to be the low-cost incubator for Britain’s fledgeling businesses.
In some quarters it has gained a reputation as an overpriced, under-regulated casino inhabited by thieves and blaggards.
Granted there have been some spectacular blow-ups on Aim, such as Quindell, and there are businesses that run out of cash or ideas. But that is only to be expected given the immaturity of companies on the exchange.
But never ever have we seen on Aim anything of the scale of Carillion, which as well as wiping billions off the value of people’s savings, could drag with it down the plughole tens of thousands of jobs.
And of course, before that, there was the banking crisis, which posed a systemic threat.
Risky, racy but bringing through the next generation
So, while Aim’s risky, racy reputation is well deserved, nothing will damage your wealth more than a snafu at one of the market’s so-called blue-chips.
We shouldn’t forget there have been some huge success stories among the so-called ‘junior’ ranks. The clothing retailer ASOS leads the pack with a market capitalisation of £5.6bn. This would qualify it for a berth in the FTSE 100 if management was prepared to fill in the paperwork required.
Next in the AIM list comes Hutchison China Meditech (£3.7bn), followed by the drinks group Fevertree (£2.6bn).
In all, there are 16 companies valued at over £1bn, which shows the alternative market is fulfilling its primary role – creating the market’s next generation of winners (albeit from a dubious gene pool).
The latest company to swell the ranks of the ‘£1bn club’ is Clinigen, a speciality pharma and pharma services group that joined Aim back in September 2012.
Its shares were listed for 164p each and are now changing hands for £10.70, valuing it at £1.3bn.
Your investment would have grown exponentially
Had you bought £1,000 worth of stock at the IPO, it would be worth in excess of £6,500 today (excluding dividend payments).
Back in late 2012 Clinigen provided clinical trial supply services and sold a number of niche products, the most valuable of which was an oncology drug called Foscavir.
In its first full year as a listed company its revenues were £123mln, giving underlying profits of £20mln.
Under former chief executive Peter George and his successor Shaun Chilton, it has been transformed via a series of well-judged, quickly integrated and, crucially, cash generative acquisitions.
This year sales are expected to be around £370mln, rising to £405mln, giving adjusted profits of £77mln and £93mln respectively.
Clinigen’s most recent purchase, the £150mln takeover of Quantum Pharma, shows the company has become more ambitious in its deal-making.
The last update revealed the contribution from Quantum is yet to make its full impact on the profit and loss account, while there will undoubtedly be significant cost-savings and synergies from a union of this kind.
Deals no longer bite-sized
The risk, however, as the deal flow expands from the bite-sized to the five-course variety, is these transactions are harder to digest. In other words, there is more scope to muck them up.
The early feedback from Clinigen is that Quantum is bedding in well, and, crucially, cash flow used to service the firm’s £142mln of debt has been good.
Looking at Clinigen’s investment credentials, based on peers in the pharma and pharma services business the stock would appear to be a little pricey on just under 22-times this year’s earnings; however, the multiple falls to 18 times next year and just 16 by 2020, which unwinds the shares’ premium rating.
It should also be pointed out Clinigen pays a dividend, though at an estimated 5.3p the yield isn’t the most generous.
Charles Weston, healthcare analyst at the London arm of the German bank Berenberg, is a fan. He rates the stock a ‘buy’, values it at £12 a share, and likes its “growth profile [and] diversified revenue stream”.
Given its size, the pace at which it is growing and undoubted demand for stock from institutions that can’t invest in the junior market, one wonders how long it will be before the company moves its listing to the FTSE 250.