Don’t be shy, ask ii…why do companies switch to AIM?

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Simon Vallard asks:just recently Emmerson Plc said it will cancel its Main Market listing and move to AIM. They state that they will save money by listing on AIM. What does this mean for existing shareholders? Does it mean their shares are no longer worth anything and they will lose their money? Will existing shares just be moved to AIM, or do you just lose out on the day everything changes? I'm new to the share and was told this firm had a bright future.

Andrew Hore (pictured above), award-winning AIM writer, says: Although AIM was designed as a way of attracting earlier stage companies, some of which could then graduate to the Main Market of the London Stock Exchange, there have been many more companies that have moved the other way. In fact, some companies that graduated from AIM to the Main Market have subsequently returned to the junior market.

Some more high-profile companies on AIM were originally on the Main Market and may have been listed for decades. This includes soft drinks maker Nichols (LSE:NICL) and identity services provider GB Group (LSE:GBG). Sometimes companies have made the move because they are doing badly and need to restructure – most recently Mothercare (LSE:MTC).

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Electrical accessories company Volex (LSE:VLX) is a company where the share price has recovered strongly since joining AIM in January 2018 and the current share price is six times the level it was then. The share price fell by nearly one-third in the 12 months prior to the switch from the Main Market.

How and why does it happen?

The move is straightforward. There is no prospectus required because the shares are already trading on a recognised stock market.

There are a range of reasons why a company might believe it is better suited to AIM.

Regulation

It is not as simple as saying that AIM is less regulated than the Main Market, particularly when it comes to a standard listing, which is a segment of the Main Market. There are different requirements, though, which mean that shareholder approval is required for relatively small acquisitions, disposals or other transactions for a listed company, but not for an AIM one. For example, shareholder approval is not required for AIM companies entering a transaction unless it is deemed to be a reverse takeover, or it involves a fundamental change of business.

The differing regulations mean that management can be more flexible and get on with strategy without needing to wait for a shareholder vote. It can make disposals easier and fundraisings quicker.

In some cases, companies do not have the required 25% free float [the shares of a company that can be publicly traded] to be listed on the Main Market, so they move to AIM to retain a quotation. This happened to HSS Hire (LSE:HSS) after a fundraising at the end of 2020.

Cost

Not having to send a circular to shareholders and hold a general meeting can be a five- or even six-figure cost saving. If a company is trying to restructure and improve its performance the lower cost and quicker application of strategy are important.

Tax

Companies can benefit from moving to AIM because, if eligible, they may be able to raise cash via the Enterprise Investment Scheme (EIS) or Venture Capital Trusts (VCTs). EIS provides tax relief for investors that invest in a new share issue of an eligible company. Investors also get tax breaks from investing in VCTs, which invest in a portfolio of unquoted, including AIM, companies.

Shareholders also benefit from the move to AIM because they can get relief from inheritance tax (IHT) on their stake in an eligible company if it is held for at least two years. There is also additional demand for shares from AIM IHT portfolios, which has helped the share price performance of the likes of Nichols.

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Previously, companies moving to AIM would require investors to sell the shares if they were held in Individual Savings Accounts (ISAs), but this is no longer a concern since AIM shares became eligible for ISAs in 2013.

Also, there is no stamp duty on AIM share trades – it was abolished in 2014. That might provide a further boost to liquidity.

Profile

Small companies can get lost on the Main Market, where the focus tends to be on the largest companies. Floor-coverings suppler James Halstead (LSE:JHD), or even smaller companies like Portmeirion Group (LSE:PMP) would not have as high a profile.

Emmerson

Potash mine developer Emmerson (LSE:EML) moved from a standard listing to AIM in April. Flexibility and lower costs were emphasised by the management. Emmerson floated as a shell [a company which has no operating business and typically holds just cash] in February 2017 and the following year acquired the Khemisset potash project in northern Morocco. 

The Emmerson share price reached a high prior to the recent £5.5 million placing at 5.575p and had already fallen prior to the announcement of the AIM move. There was a further fall, but the share price has traded within a narrow range since then.

Shareholders still own the same number of shares. There is no loss of value from moving to AIM, but sometimes existing shareholders, particularly institutions, have rules that mean that they are not allowed to invest in companies that do not have a major market listing. Their selling could hold back the share price in the short-term.

As a small resources company, Emmerson is a risky investment because the mine is not yet developed and there is political risk from the location in Morocco, although it does have established mining laws and it is a less risky jurisdiction than many other African countries.

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Grain prices are rising and that is leading to higher demand for potash, which is pushing up its price. However, the potash price, as for any commodities, could be volatile over the coming decades.

Funding the Khemisset mine

The construction of the Khemisset potash mine requires a substantial amount of cash. The latest project development plan suggests capital investment of $287 million, including contingencies, is required for the initial phase.

Even if debt provides most of the funding, share issues will be required if Emmerson is going to retain a substantial stake in the project. A strategic partner is likely to be secured to help finance the mine.

The net present value (NPV) (using an 8% discount rate) of the full project is $2.37 billion and even the first phase could be worth more than $500 million.

When the Khemisset mine is up and running it should be one of the lowest cost producers of potash in the world. There is significant potential upside once the mine is funded and the development progresses.