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I The Alternative Investment Market (AIM) is home to many of the FTSE’s smaller stocks. AIM’s main advantage is that it provides access to the capital these companies need to grow, without the regulatory burden imposed by other markets.
But sometimes it results in a company’s valuation that seems to be literally divided. To illustrate this point, I found two examples.
Onward and upward
Time in Finance (LSE:TIME) is a specialist lender to over 10,000 small businesses in the UK.
Since its IPO in August 2006, it has expanded both through acquisitions and life. At 31 August 2024, it had a loan book of £205m. By May 2021, directors set a four-year borrowing target of £230m. To me it looks like it will reach this goal comfortably ahead of schedule.
The company’s results for the year ended 31 May 2024 (FY24) revealed revenue of £33.2m (FY23: £27.6m) and profit before tax of £5.9m (FY23: 4.2m).
All this good news has helped its share price rise by 98% since November 2023.
And with a book value of £66m and a current (6 November) stock market value of £55m, there is a case to be made to suggest its shares are undervalued.
But its stock currently trades at a historic price-to-earnings ratio of 15.5, the highest ever FTSE 100banks.
All over
In contrast, the share price of They are (LSE:BGO) is down 39% over the past year.
It helps phone companies and content providers retain customers by bundling subscriptions. It has a list of blue-chip clients in a global subscription market that could, by 2026, be worth $600bn.
But its share price can be very volatile.
For example, its stock price dropped 40% on January 17th when it issued a trading update. The company warned of delays in securing new contracts and pointed to $2m in unexpected costs.
On 8 April, it presented its results for the year ended 31 December 2023 (FY23). Despite a $6.7m increase in after-tax losses, its shares rose 13.5%. 62% profit growth is the only explanation I can come up with for this distorted market reaction.
And inexplicably, on July 30, the share price rose by 12% after it added Nord Security products to its so-called digital vending machine.
No thanks!
But despite their growth potential, I don’t want to invest in any of these stocks.
They are too risky for me and have the typical characteristics of AIM shares that have put me off investing in smaller companies.
The rise in Time Finance’s share price seems detached from its underlying performance. It now attracts much higher wages than, for example, Lloyds Banking Group.
And the loss-making Bango is 46% higher than Time.
The stock price is also not very good. A combination of relatively few shares per article and a small market cap, means a trade of a few thousand pounds can have a huge impact on a stock market calculation.
I am not saying they are bad companies. Their AIM listing has played a key role in driving their phenomenal growth. But I prefer to buy large companies – with reasonable valuations – and those whose share prices are often predictable.
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