As the market becomes even more illiquid for the region’s smaller-cap companies, Christian Annesley counts the cost of a public listing.
At the close of 2007 the total market capitalisation of companies listed on the Alternative Investment Market (AIM) stood at a heady £98bn. Just 12 months on it was £38bn.
Within a year did the combined intrinsic value of the 1,500-plus companies on AIM really fall nearly 60 per cent? And if not, what is the story behind the numbers?
Listed companies are fairly thinly spread across the South West, which has slightly more than 80 businesses quoted on AIM or on the London Stock Exchange’s main market. But the West Country has slightly more AIM listings than main market businesses, and share prices have dropped the most among the smaller-cap businesses in the past 18 months. It may seem hard to believe, but, by comparison, some of those on the main market have got off lightly.
John Banks, corporate finance partner at AIM specialist Baker Tilly, says how events pan out in the first half of the year will determine how soon the crisis will pass for smaller-cap companies.
“It’s critical things don’t get much worse,” he says. “Over the next month or two the world’s banks will release their full audited accounts for 2008. Will they be worse or better? It’s hard to say, but at least we will know the full extent of the problem.
“And how soon can we get confidence back into the markets? In part that will come down to how effective the government’s initiatives prove to be, though for my money the SME package still looks inadequate.”
Even in the best case scenario, experts says AIM activity will remain subdued since the market capitalisation of many companies has fallen to levels where the institutional investors aren’t interested.
Banks says: “Many investors have no appetite to get involved with companies that have a market capitalisation of less than £25m. But at the moment three-quarters of AIM companies are capitalised at less than £20m. You have to ask the question: once you get down to that level is it worth staying on the market?”
The trouble is, with little liquidity in the market, delisting is easier said than done. “To delist you need holders of 75 per cent of the share stock to back the motion,” says Tom Cooper, a director at Winningtons, which specialises in PR for small-cap companies. “But, for shareholders, holding private paper is a waste of time. As an investor, owning it is nonsense.”
Cooper reckons the best bet for many companies burdened by a low share price is to hang in there and ride out the financial crisis. He says: “You need to recognise the cycle. Most companies on AIM are cash-positive, even if their share price is divorced from the fundamentals of the business at the moment. So they should wait for the world to right itself.”
It’s not a question of simply sitting tight, though. Businesses are still having to navigate their way through the global downturn. “You have to show real leadership and take big decisions to stay in good shape,” says Matt Ward, director of transaction advisory services at Ernst & Young in Bristol. “After all, there is a long list of pressures facing most companies, whether it’s declining sales volumes, increased counterparty risk or availability of bank finance.”
Ward says every management team of a listed company should be asking themselves questions such as: “How will the economic climate impact the business? What steps are we taking to maximise shareholder value? Do these steps address all stakeholder concerns? And can the team deliver the plan?”
But if those are the top-level questions, some of the devil is in the detail. Whatever else is going on, it’s crucial that companies don’t stop reporting on their activities to the market, says Cooper. “While the next 12 months could be unpleasant or unrewarding, you shouldn’t shirk your reporting responsibilities.
“A listed company has to behave like one at all times. If you shut up shop because of the illiquid market you won’t have an unbroken story to tell to investors when the market returns. I’m sure that sounds like a rather unrewarding jam-tomorrow sort of exercise but that’s the price of a listing.”
But, if the situation is bad, the stories are not uniformly bleak. Some of the region’s companies have bucked the market’s downward trajectory including Swallowfield, which makes cosmetics and personal care goods from its headquarters in Wellington in Somerset, and others, like Sirius Exploration in the mining sector.
For other listed companies, even if their share price has taken a dive, the fact that they are still successfully raising money on AIM is one reason to be cheerful. Nighthawk Energy, the Bristol-headquartered company that makes its money drilling for oil at formerly mothballed sites in the US, in in this camp. The company recently raised £7m through a conditional placing of new shares at just 20p each – far below its 82p August 2008 share price – but managing director David Bramhill says raising capital is a feat.
“We are lucky. It’s a great business and lots of institutions still want to support us,” he says. “It’s important to remain positive. If we can raise funds to shore up the company’s balance sheet and bring our discoveries online, that will result in cash flow down the line. Doing nothing is not an option: if you go down that road you are pandering to the share price rather than the needs of the company.”
Bramhill admits the share price is “harrowing” but says he and his fellow directors remain focused on building what is still a new company.
Nighthawk Energy last raised money on AIM in November 2008 when it achieved its target of raising £5m. Bramhill says going to the market for capital is unavoidable for a company that is investment-intensive.
“Developing our drilling sites costs a lot of money. Each well costs more than £1m, despite the US being a good place to operate because it is legally straightforward to get going. So we will keep going back to the investors as often as we have to,” he says.
This time the funds will go towards continuing the development of the Jolly Ranch Group project in Colorado, where Nighthawk reckons the company’s operating break-even threshold is $25 a barrel and falling.
“We believe oil prices will strengthen in 2009 and beyond. As such, committing to focused development spending at this time will place Nighthawk in a strong position to capitalise from the anticipated upturn,” adds Bramhill.
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