Four AIM shares that are potential bid targets

Takeover activity remains a major factor on AIM, and it is a significant reason why the number of companies on the junior market is falling at such a rapid rate. Not just that, but AIM is also losing some of its better companies.

In the first quarter of 2024, nine out of the 17 companies that left AIM were taken over and last year bids accounted for around two-fifths of the departures. Other bids, such as the takeover of wealth management company Mattioli Woods (LSE:MTW) are nearing completion.

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Two out of the top 10 AIM companies by market capitalisation at the end of 2022 have been acquired, while the figure is seven out of the top 100, with two more currently involved in bids – Mattioli Woods and self-storage sites operator Lok'n Store Group (LSE:LOK), where Belgium-based Shurgard Self Storage has launched an offer.

There has also been a bid approach for Alpha Financial Markets Consulting Ordinary Shares (LSE:AFM), which was in the top 50 companies. Bridgepoint Advisers made the original approach to the provider of consultancy services to wealth management companies and Cinven is also considering making a bid.

While some takeovers are due to companies being short of cash, such as sustainable fuels developer Velocys, many of the targets are relatively large, profitable AIM companies that are generating cash and have excellent long-term prospects – not necessarily reflected in the share price, though.

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The bidders can see that there is value in many AIM companies because of their share price underperformance in the past three years. Even the modest uptick in AIM’s performance has not done much to raise the ratings of these companies and some are well below their record highs.

There are still plenty of AIM companies which are trading on multiples that do not reflect the medium-term potential of the businesses.

Here are companies that might fall prey to a bidder. Even if they do not, the underlying value of the businesses should eventually be recognised by the market, although it may take a little longer.

Vertu Motors (VTU)

Share price: 70.5p
Market capitalisation: £238 million

The takeovers of Cambria Automobiles, Marshalls, Lookers and the Pendragon car dealerships, plus the planned sale of its vehicle distribution business by fully listed Inchcape (LSE:INCH), mean that there are few peers left for Vertu Motors (LSE:VTU) and anyone who wants exposure to motor dealers. Caffyns (LSE:CFYN) remains on the Main Market, but it is much smaller and less profitable. Caffyns does have a lower rating, but the track record is not as good as Vertu Motors, although it does trade at an even bigger discount to net asset value (NAV).

Vertu Motors has grown sharply since joining AIM in December 2006 at an issue price of 60p and a market capitalisation of £5.4 million. It has been a regular dividend payer since 2011, other than in the period of Covid lockdowns. Management has used cash generated from operations and debt to grow the business via acquisition and subsequently improve the profitability of those dealerships. Vertu Motors is a dealer for a wide spread of manufacturers of cars and other vehicles.

Vertu Motors is releasing full-year figures to February 2024 on 15 May. Progressive Research forecasts an improvement in pre-tax profit from £36.5 million to £37.3 million, while NAV is forecast to rise to 108.5p/share. Net tangible asst value is estimated at 70.5p/share. The prospective multiple is less than nine.

There is stake building. Cinch Holdings holds 9.1%, while Dublin-based motor dealer Nivag Holdings recently increased its stake from 3.3% to 4.1%. Vertu Motors would be an attractive proposition for anyone seeking a significant presence in the UK motor dealer market, but even without a takeover the investment made in the business will pay off in the longer term.

Kinovo (KINO)

Share price: 49.8p
Market cap: £31.3 million

Property services provider Kinovo (LSE:KINO) revealed this week that trading is ahead of expectations, with organic growth of 23% in the year to March 2024. Underlying pre-tax profit should be more than £6 million.

That excludes costs related to the DCB contracts, which were guaranteed by Kinovo when it was sold. Some of these are still to be completed, but they are progressing. Kinovo previously admitted that the costs of the guarantees to complete work on these projects will be £2.9 million higher than previously expected – taking the total cost to £8.6 million some of which has already been spent. That is why the share price tanked and has only partly recovered.

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Yet, the balance sheet is strong, and cash generated by the business should cover the additional costs and still leave net cash by the end of March 2025. The shares are trading on less than seven times estimated 2023-24 earnings and there should be a further profit improvement in the current financial year.  

Directors were buying shares at around 41p each during March. Kinovo would make a good add-on business for a larger property services firm that would not have any trouble financing the DCB contracts. There should be a significant recovery in the share price over the next couple of years as the DCB contracts become a thing of the past and Kinovo can be judged on its core business.

Team Internet Group (TIG)

Share price: 138.6p
Market cap: £346.7 million

Domain name and online marketing business Team Internet Group (LSE:TIG) remains modestly rated despite the strong growth exhibited in the past couple of years. Most of that growth has come from the online marketing division, and it may be that the earnings are not thought to be high quality. Even if that is so, a prospective multiple of seven appears mean, particularly given the strong cash generation.

Acquisitions have been important in accelerating growth, but there is organic growth. In 2023, revenues were 15% ahead at $836.9 million, including organic growth of 13%. Underlying pre-tax profit improved from $70 million to $77.2 million. Net debt increased to $95.3 million because of share buy backs and acquisition payments. The company has also commenced paying dividends.

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This year nearly $90 million in cash is likely to be generated by operations. Team Internet has spent $41.8 million acquisition of Shinez, which creates and promotes content across social media and search engines.

First-quarter figures will be published on 13 May. These are expected to show continued growth. The acquisition of Shinez was not completed until the end of April so will not be included. If the valuation does not improve then Team Internet’s strong position in the domain names sector and the cash generative growth of the business would make it an attractive bid candidate for a private equity firm.

Seeing Machines (SEE)

Share price: 4.585p
Market cap: £190.6 million

Driving safety technology developer Seeing Machines Ltd (LSE:SEE) has spent decades perfecting its technology and it has been winning contracts to supply it to automotive manufacturers. Revenues from those contracts have started to build up and the company is moving towards profitability.

Seeing Machines says the number of vehicles on the road using the company’s technology has more than doubled to more than 1.5 million units. The cumulative initial lifetime value of 17 programmes with 11 customers is $366 million, and most of these revenues will be booked by 2028.

The share price is well off its high in 2021, let alone the all-time high in 2018, and the share price trend line is still heading downwards. Yet, the company should reach cash breakeven during the next financial year.

However, loss-making technology companies are not in favour, currently. That is why it has been difficult for the share price to make a consistent recovery despite the contract wins. The forecast loss for the year to June 2024 is nearly A$25 million. Next year the loss could be little more than A$1 million before a move to a pre-tax profit of more than A$17 million in 2025-26. Profit should grow as more contract programmes mature.

Chief executive Paul McGlone has been exercising options, some of which were priced at 5.4p/share and 5.09p/share, which is well above the current share price suggesting he is confident about prospects. The finance director has also been buying shares at an average price of 4.42p each.

An automotive components supplier could find Seeing Machines an attractive purchase now that much of the risk has been taken away due to the contract wins. There is already a collaboration deal with Magna International Inc (NYSE:MGA) to develop occupant monitoring via the rear-view mirror. Canada-based Magna also has a $47.5 million convertible note, which is convertible at 11p a share. Magna is certainly big enough to make the acquisition of Seeing Machines a realistic possibility as results improve.

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.