Five AIM stocks for an inheritance tax ISA in 2023
17th February 2023 14:51
by Andrew Hore from interactive investor
One way of potentially paying less inheritance tax is to build a portfolio of eligible AIM shares. Our award-winning AIM writer Andrew Hore explains how to do it and names a handful of stocks he’d tuck away for the long term.
This week I am writing about potential ISA share investments providing growth potential that you can hold for the long term. Whether AIM shares are held in an ISA or in any other form, the basic requirements for an inheritance tax (IHT) relief investment are the same. To gain the benefit of passing on the AIM investments without them being eligible for inheritance tax the shares have to be held for at least two years.
These five share recommendations are a mix of profitable businesses with opportunities to grow, and companies that have potential to benefit from the uplift in technology valuations.
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RBG Holdings
48p
Legal services provider RBG Holdings (LSE:RBGP) has a solid underlying business, but a failed diversification into litigation funding through a specially formed subsidiary LionFish has masked this. LionFish will be run down, and the group profit will bounce back in 2023 without this drag on performance.
LionFish lost two recent cases leading to a £4 million write-off for 2022 and it is losing money, which led to downgrades in December. At the end of January, the board terminated the contract of chief executive Nicola Foulston because it lost confidence in her strategy.
There are two lawyer brands owned by the group. Rosenblatt is focused on litigation work predominantly with high-net-worth individuals and entrepreneurs. Memery Crystal was acquired for £30 million in April 2021, and it adds a specialisation in corporate transaction services for multinationals and smaller businesses. There is also sell-side corporate finance boutique Convex Capital.
The underlying 2022 pre-tax profit is expected to be in line with expectations of £6.9 million, down from £10.7 million. A recovery to £10.1 million is forecast for this year. The latest interim dividend was 2p a share. Singer forecasts a total dividend of 3p a share for 2022, before recovering to 4.5p a share in 2023. That provides an attractive prospective yield of 9.4%.
The current share price is well below the flotation share price of 95p when RBG joined AIM in May 2018. This is a good business and the LionFish problems have provided an opportunity to buy the shares at a relatively low 2023 prospective rating of six time forecast earnings.
Facilities by ADF
64p
Facilities by ADF (LSE:ADF) was the first AIM new admission of 2022 and it won the best newcomer at last year’s AIM awards. The company provides vehicles and services to the film and TV industry, and it is investing the £15 million raised from its stock market listing at 50p a share to grow the vehicle fleet.
Facilities by ADF has also acquired Location One, which also provides services to the TV and film industry. The initial cash payment is £4.5 million with a further £1.7 million of deferred consideration in shares. The other £2.7 million is dependent on achieving earnings targets over a three-year period.
Clients include Netflix, HBO and Disney. Investment in content for streaming platforms is leading to increasing demand for services, and visibility of work is good. Profit was lower in the first half, but the second half was much better. That is because there were more series with longer filming times, rather than short projects.
A strong order book underpins expectations for this financial year. Pre-tax profit is forecast to rise from £4.3 million to £6.6 million on a 50% increase in revenues to £47.6 million in 2023. The share price has risen following the recent trading statement and the prospective multiple is 10. The strong demand for content makes the shares attractive without the risks of direct investment in the content.
Mercia Asset Management
30.5p
Technology and biotech have been out of fashion in the stock market because of their lack of underlying fundamentals. This will change, though, which makes it a good time to take a long-term view and gain exposure to these technology companies.
Mercia Asset Management (LSE:MERC) operates general funds, EIS funds and Venture Capital Trusts. Many of the investments are technology related and the risk is spread. The acquisition of Northern Venture Managers increased scale and enabled Mercia Asset Management to generate enough cash to cover its operating costs with additional upside from its own direct investments.
At the end of September 2022, net asset value (NAV) was 46.8p a share. The cash pile was £56.1 million. Third party funds under management were £773 million.
When the results were announced, Frontier Development Capital was bought for up to £9.5 million. This enhances business lending activities and brings £415 million of funds under management. Frontier makes larger loans than Mercia Asset Management and there could be existing clients that require loans to grow their businesses. The deal is immediately earnings enhancing.
Since the balance sheet date, investee company Intechnica has been acquired and this generated £3.7 million for the 25.5% direct stake, which was valued in the books at £2.2 million. NVM Private Equity achieved the targets to trigger the £2.1 million of deferred consideration. There were 6.47 million shares issued at 32.45p each at the end of January.
The shares are trading at a one-third discount to NAV. Longer term, there is plenty of upside from the maturing direct investment portfolio.
Ramsdens Holdings
241.5p
Pawnbrokers are set to do well in the current economic conditions with household incomes declining in real terms, and Ramsdens Holdings (LSE:RFX) has a good track record, even in better times. The woes of rival credit providers such as Morses Club and Amigo provide additional opportunities for the group. There are 154 stores and new store openings have slowed, but that is set to change. Management is careful to secure the correct sites in new towns.
Although Ramsdens is a pawnbroker, the other activities generate most of the profit. It retails jewellery and buys gold. It also has a foreign currency business that has in the past been a major contributor to profit, and it should eventually get back to previous levels now that Covid measures do not hamper travel as they have done in the past few years.
Ramsdens did much better than expected in the year to September 2022. Earnings forecasts for 2022-23 were upgraded by 5% following a 6% upgrade in October.
The pawnbroking division did not do as well as expected. Even so, group revenues increased by 62% to £66.1 million, while pre-tax profit jumped from £564,000 to £8.27 million. Net cash is £8.84 million, following investment in jewellery stock. The total dividend is 9p a share.
This year’s pre-tax profit forecast of £8.9 million appears reasonably conservative. The shares are trading on less than 12 times prospective earnings and the forecast yield is 4%. The record suggests there could be potential for upgrades later in they year. A good long-term buy.
Ilika
48p
Battery technology developer Ilika (LSE:IKA) is the more risky of the five companies. It had a period when it was an investor favourite, but the share price has slumped. The share price has fallen by more than three-fifths over the past year. Yet, Ilika is in a much better position than it was in early 2021 when the share price peaked.
The Stereax M300 miniature battery should be launched by the summer after some delays last year. A manufacturing licence deal with Cirtec Medical will enable a significant boost in production for Stereax. Machinery will be transferred to Cirtec Medical’s factory in Massachusetts as part of the tech transfer deal. There are initial orders from 18 medical companies and there is plenty of scope for increasing production as required.
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This is not an exclusive deal and similar deals can be made around the world. Ilika continues to own the intellectual property and it can put more resources into developing the customer base, as well as further investment in the technology.
The larger Goliath battery is on the way to reaching parity with equivalent lithium-ion batteries. It is designed to be cost-effective and recyclable. Ilika has been awarded a UK government grant of £2.8 million for taking a leading role on a 24-month Faraday Battery Challenge in collaboration with BMW and Williams. This will further the development of the Goliath battery for automotive use.
Net cash was £17.8 million at the end of October 2022. The cash should last well into 2024, but there will be a requirement for more cash as Ilika approaches breakeven. By that time there should be positive news concerning demand for Stereax batteries from medical device companies. The potential for Stereax more than underpins the share price, leaving no value attributed to Goliath. Take a long-term view of this investment.
Andrew Hore is a freelance contributor and not a direct employee of interactive investor.
Disclosure
We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.
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