What happens when main market stocks join the AIM

With Mothercare about to move to the junior market, we sum up the ups and downs of this process.

Mothercare (LSE:MTC) is the latest fully listed company about to make the move to the AIM. The junior market was designed to provide a stream of companies that could graduate to the main market, but there have been even more that have moved the other way.

There are 15 companies that have made the move since the beginning of 2016. One of those companies was recruitment firm Harvey Nash, which was taken over in 2018 for 130p a share – a one-third increase on the pre-AIM share price. The others are still on the AIM. There were 31 companies that made the move between 2011 and 2015.

Some of the largest companies on the AIM moved from the main market in the previous decade. That includes airline Jet2 (LSE:JET2), floor coverings supplier James Halstead (LSE:JHD), carpets and tiles manufacturer Victoria (LSE:VCP) and identity services provider GB Group (LSE:GBG).

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Tool and equipment hire business HSS Hire (LSE:HSS) is the most recent to switch between the markets, having moved to AIM on 14 January. HSS floated on the main market in February 2015 and it was valued at £310 million at the issue price of 210p. The share price was 11.85p prior to the move to the AIM and it had fallen below 10p a few weeks prior to that.

In December, HSS raised £52.6 million at 10p a share through a placing and open offer, which quadrupled the number of shares in issue. The lack of free float after the recent fundraising was a reason HSS had to move from the premium list.

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The pre-Christmas move by retailer N Brown (LSE:BWNG) was sparked by the main shareholder Lord Alliance, who made the switch from the main market to the AIM a condition of his investment in a £100 million placing and open offer at 57p a share. The ease of completing acquisitions/transactions and tax advantages were attractions of the AIM.

The rate of flow of main market companies to the AIM has slowed, but Mothercare indicates that it is still an attractive home for companies that have fallen from favour and are having a tough time in terms of finance and trading.

The latest companies are good examples of that type of business. They were large companies at one point, but the slump in share price makes them worth a fraction of their previous market value. N Brown is unusual in being worth more than £260 million. Most of the companies that have moved in this direction in the past decade have been valued at less than £50 million. 

Two decades ago, there were also companies with large family holdings moving to the AIM because of the tax benefits. These include James Halstead and Young & Co's Brewery (LSE:YNGA).

Ten out of the 14 companies, excluding Harvey Nash, moving to the AIM between 2016 and 2021 had declining share prices in the previous 12 months. Five had more than halved. The share price of six of the companies has fallen since the move and four of those represent a continued slide in the share price.

The best performer in the year prior to switching to the AIM was trickle window ventilation products supplier Titon Holdings (LSE:TON) which rose by 18.5% before moving in December 2018. Problems with its Korean business have led to a 39.4% decline since then.

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There was a time when some companies that moved to the AIM were in such a poor financial position that they subsequently went bust. Companies are supposed to declare that they have enough cash for their requirements when they move, but this does not stop them from getting into financial difficulties in a short period of time. The last one to go bust was JJB Sport, which moved in April 2011 and appointed administrators in October 2012.

JJB is nowhere near the quickest company to go bust after joining the AIM. Real Hotel Group and engineer Wagon both moved to the AIM late in 2008 and each appointed administrators within weeks.

In recent years, there have been shells floating on the standard list because they would not be allowed to float on the AIM. Some stay on the standard list when they find an acquisition, but four of the companies have joined the AIM. Of these four, only the Trident Royalties (LSE:TRR) share price has risen – a 90% gain in eight months.

GB Group is an example of how the move to the AIM can work. The original business floated in the mid-nineties. The share price was near to an all-time low when GB Group moved to the AIM in August 2010. It took until 2017 for the share price to move above its previous high in 1994.

GB Group was valued at £22 million in August 2010 and it has risen in value to £1.73 billion. The AIM has made it easier for the company to make acquisitions and expand the business. Pre-tax profit has risen from £1.3 million in the year to March 2010 to a forecast 2020-21 pre-tax profit of more than £42 million.

Some of the increase in market valuation reflects the shares issued to help finance the acquisitions. However, the share price is 34 times the level it was in August 2010, when GB Group joined the AIM.

Electrical accessories supplier Volex (LSE:VLX) is the latest example of a poorly performing company where management has turned the business round and used the AIM quotation, and its more flexible rules for acquisitions, to regrow the business. The share price is six times the level it was in January 2018, having slumped by one-third in the previous 12 months. The share price is back to the level it was a decade ago and Volex is in the top 60 AIM companies by market capitalisation.   

There are companies that will continue to benefit from their move to the AIM. Building products supplier Alumasc (LSE:ALU) has restructured its business and it is returning to paying dividends. The base is strong and add-on acquisitions will be assessed and that could enhance earnings. Sureserve (LSE:SUR) should also continue to improve its performance and could broaden its range of energy savings services.

One of the companies that has moved in the past decade is City of London Group (LSE:CIN). The company has been transformed in the past year through the granting of a banking licence to new subsidiary Recognise. The bank’s management team is currently being recruited and infrastructure developed.

Recognise is focusing on the small business market. The licence currently includes restrictions, but the full licence should be received during the first half of this year. Existing financial services operations will be rebranded Recognise, or the bank will sell their products under the Recognise brand.

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PCF Group (LSE:PCF) has shown how valuable a banking licence can be. The business has to be well-funded and focused. Recognise is still at an early stage of its development, so it is difficult to assess how it will do. City of London has raised cash to develop the bank and cover the short-term losses. If the bank grows as management believes that it could, then there is plenty of upside from the current share price, which is below the 80p placing price last autumn.

Capital equipment manufacturer Mpac (LSE:MPAC) has shed its cigarette manufacturing equipment business and the focus on healthcare and pharma sectors has helped to improve its performance and prospects. It moved to the AIM in June 2014 and the share price has trebled since then. Even so, the share price has merely got back to the level it was in 2003 and it is well below the mid-nineties level.

Mpac did better than expected last year, although pre-tax profit is still likely to decline from £7.5 million to £6.2 million. Net cash is £5 million following the payment of £10 million for the purchase of packaging automation manufacturer Switchback last autumn. The order book is worth more than £55 million, compared to 2020 revenues of £83 million.

Mpac shares are trading on 15 times prospective 2021 earnings with scope for continued growth in the core markets.

Companies moving from Main Market to AIM 2016-2021

*Shell company that joined AIM from the standard list

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