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The Alternative Investment Market (AIM) is home to many smaller FTSE stocks. AIM’s principal advantage is that it provides access to the funds that these companies need to grow, without the regulatory burden imposed by other markets.
But sometimes it gives rise to company valuations that appear to be divorced from reality. To illustrate this point, I’ve found two examples.
Onwards and upwards
Time Finance (LSE:TIME) is a specialist lender to over 10,000 small businesses in the UK.
Since its IPO in August 2006, it’s expanded both through acquisition and organically. At 31 August 2024, it had a loan book of £205m. In May 2021, the directors set a four-year lending target of £230m. It looks to me as though it’s going to achieve this goal comfortably ahead of schedule.
The company’s results for the year ended 31 May 2024 (FY24) disclosed revenue of £33.2m (FY23: £27.6m) and a profit before tax of £5.9m (FY23: 4.2m).
All this positive news has helped its share price increase by 98% since November 2023.
And with a book value of £66m and a current (6 November) stock market valuation of £55m, there’s a case to be made for suggesting that its shares are undervalued.
But its stock is currently trading on a historic price-to-earnings ratio of 15.5, which is higher than all of the FTSE 100‘s banks.
All over the place
In contrast, the share price of Bango (LSE:BGO) has fallen 39% over the past year.
It helps telecoms companies and content providers retain customers through the bundling of subscriptions. It has a blue-chip customer list in a global subscriptions market that could, by 2026, be worth $600bn.
But its share price can fluctuate wildly.
For example, the value of its stock crashed 40% on 17 January when it issued a trading update. The company warned of delays in securing new contracts and identified $2m of unexpected costs.
On 8 April, it presented its results for the year ended 31 December 2023 (FY23). Despite the $6.7m increase in post-tax losses, its shares went up 13.5%. The 62% growth in revenue is the only explanation I can come up with for this apparently perverse market reaction.
And inexplicably, on 30 July, its share price tanked 12% after it added Nord Security’s products to its so-called digital vending machine.
No thanks!
But despite their growth potential, I don’t want to invest in either of these stocks.
They’re too risky for me and have characteristics typical of AIM shares that has historically put me off investing in smaller companies.
The rise in the share price of Time Finance appears to be divorced from its underlying performance. It now attracts a higher earnings multiple than, for example, Lloyds Banking Group.
And loss-making Bango has a valuation that’s 46% higher than Time’s.
Its stock price is also highly erratic. The combination of relatively few shares in issue and a small market cap, means a trade of a few thousand pounds can have a dramatic impact on its stock market valuation.
I’m not saying they’re bad companies. Their AIM listing has played an important part in fuelling their impressive growth. But I prefer to buy larger companies — with more sensible valuations — and ones whose share prices tend to be more predictable.
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