A Portfolio of Shares in AIM (1)

And The Stanley Gibbons Group PLC

Image, courtesy Wikipedia

 

Since August 2013, investors are permitted to include shares quoted on AIM (the Alternative Investment Market) in ISAs (Individual Savings Accounts). The specific advantage of this new ruling is that, under certain conditions, AIM shares are subject to 100% business relief for Inheritance Tax. For the conditions set out by HMRC, a history of AIM and further comments on AIM see an earlier article on this website: http://thejoyfulinvestor.blogspot.co.uk/2013_02_10_archive.html

As most AIM shares are exempt from the 40% rate of Inheritance Tax, AIM shares are highly attractive to investors who want to leave their wealth to the next generation. 

However, investors should heed the truly terrible investment that AIM shares have represented. Over the last 12 years, the FT AIM Index has lost 60% of its value. Losses have been concentrated in mining, oil exploration, biotechnology and internet start-up sectors. Companies headquartered outside the UK, have been particularly bad investments.  

This leaves a good number of companies that are worth considering in a portfolio of AIM shares. This and several subsequent sections on this blog will cover AIM shares that, in addition to the usual requirements for an investment:  

1. Are exempt from Inheritance Tax. This excludes AIM stocks that are also quoted on a recognized overseas exchange and AIM companies that wholly or mainly deal in securities, stocks or shares, land or buildings, or hold investments.

2. Have a 'free float' well in excess of 25%. 'Free float' is the proportion of shares that are freely traded in the market compared to the number held by all parties. Free float is important because companies can be taken private by their owners at the price they choose if they control 75% of outstanding shares.

3. Are domiciled and have their headquarters and main assets in the UK. Companies with their assets located in emerging markets have been particularly prone to disappointment.

4. Have a good trading record, low debt or net cash and a clean balance sheet. This avoids start-ups and other companies that trade more on their promise than on results.

5. Have good governance. The loose requirements for listing on AIM have attracted managers that do not always look after the interests of outside shareholders.

6. Trade on a bid to offer spread of no more than 8%. The shortage of market makers and low market capitalizations of AIM companies have resulted in wide bid to offer spreads on this market. The price quoted in the text always refers to the offer price. 

Note: Although HMRC requires a 2-year holding period to be eligible for tax relief, this does not lock in a particular stock for this period. AIM stocks may be sold during the 2-year period and count towards the 2-year qualifying period provided the proceeds are reinvested in another AIM stock. 

Previous articles have valued two potential companies quoted on AIM that comply with these additional requirements. They are James Halstead (see http://thejoyfulinvestor.blogspot.co.uk/2013_02_10_archive.html) and Personal Group Holdings (see http://thejoyfulinvestor.blogspot.co.uk/2013_04_07_archive.html).  Note: valuations were based on information available at publication.

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The Stanley Gibbons Group PLC - AIM

Stanley Gibbons colour chart, courtesy Wikipedia

 

Stanley Gibbons, well known for its philatelic business, has a growing and profitable business in other collectibles as well - First Day covers, rare coins, medals and memorabilia. While sales from the London, Jersey and Hong Kong offices, including email campaigns and auctions, contribute the bulk of revenue and earnings, the company is working hard to develop its online business in both the UK and the USA. This is partly in response to the growth in eBay, which enables collectors to buy and sell stamps and coins easily and at a low cost.  

The Chairman explains the internet strategy in the 2012 Annual Report: 

Sales from our core website, www.stanleygibbons.com, were up 55% in the year after a 27% rise in the preceding year, highlighting the successful execution of developing most of our online offering. Whilst this growth in revenues from e-commerce activities from our own products online is encouraging, in the future it is expected that our website will deliver substantial additional revenues. This will include online commissions generated by third party sales via a global online collectibles trading platform, together with subscription revenue from online services, including virtual catalogues, up to date pricing information and an extensive archive of philatelic articles dating back to 1890. 

Earnings have continued their rise post the financial crisis and the company's net cash is currently worth 8% of its market capitalization of 90 million pounds. 

Stanley Gibbons' share price since 2000 has fluctuated wildly. This illustrates the changing sentiment for a small trading company in an unusual market niche rather than any underlying fundamentals in the business. Stanley Gibbons (in blue) has easily outperformed the very disappointing FT AIM Index (in green).

 

Graph courtesy Yahoo, click to enlarge

 

At the current offer price of 315p, Stanley Gibbons is trading on an historical PE ratio of 17 and yields 2.1%. The present high market rating is based on: 

1. Earnings per share these last 10 years have grown at a compound 16% p.a. and the dividend has grown in proportion.

2. Equity per share has grown at a compound 15% p.a. over the same period.

3. The promise of further growth from the online business.

4. The historical return on equity is a healthy 17%. However, the return on retained earnings since 2003 has declined to 13%.

5. Net margins are a healthy 15%

6. Net cash at June 2013 was 7.7 million pounds, after a 6-million pound fundraising in 2012 to purchase an online platform in the US and develop the company's online capability.

7. Operating cash flow for the years 2008-2012 covered capital expenditure, a big build-up of inventory for future sale and 80% of the dividend payments.  

8. The deficit on the defined benefit pension scheme, at 3 million pounds, is the one element that is likely to cause further charges. The scheme was closed to new members in 2002.

The interim results to June 2013 point to a halt or even reversal of growth in earnings per share for 2013. The 42% decline in first half earnings per share is attributable to the development of the online business, the start-up of the Singapore office, and a shortfall on the provision for the defined benefit pension scheme due to 'administrative errors'. The directors have responded with satisfaction at the growth in revenue and adjusted trading profits, and they have increased the interim dividend by 9%. 

This leaves the investor with two broad scenarios. 

The optimistic investor will go along with management's goals of building up capacity in online selling, its new business in the US (based on an online platform called bidStart, for which it paid $1 million) and its new office in Singapore. Supposing that Stanley Gibbons' business performs as in the past, the company's stock, according to my valuation model, is worth 358p a share. * Stanley Gibbons is then a buy at its current price, particularly when the benefit of its IHT exempt status is factored in.

*Eps growth of 16% p.a., Equity per share growth 15% p.a., 13% return on equity, average PE ratio 17, all discounted at 10.8%, less the dividend yield, for the years 2013-2017. 

However, the cautious investor will have doubts that reduce expectations for the company. 

1. What if the US venture, which competes with eBay, fails?

2. What if the online business degrades the Stanley Gibbons brand by selling lower quality products, for example the First Day covers of Benham, which it purchased in 2010?

3. The company notes in its 2013 Annual Report that it is short of expertise on rare coins and medals. Does this suggest that it is at a disadvantage with companies, such as Noble Investment, that specialise in these areas?

4. And what if the lack of control that was the cause of the shortfall on the defined benefit pension scheme has spread to other areas of the company? 

Factoring lower expectations for the company reduces its value, according to my model, to 278p.* And this does not allow for a change in sentiment. Stanley Gibbons' share price has increased by 56% since its 12-month low of 202p in October 2012. And the really cautious investor will not include any value for its IHT exempt status, given that this could be annulled by HMRC or by the company transferring its listing to the main LSE market.

*Eps growth and equity per share growth reduced to 5% and 10% respectively.  

 

Note 12 September: Today Stanley Gibbons and Noble Investments have announced they are in conversations that could lead to the acquisition of Noble by Stanley Gibbons for a total of 42 million pounds in shares and cash.