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Simon Keane looks at the cloudy investing skies and finds a silver lining in the FTSE Aim 100

Despite the widespread retreat in equity markets, Aim’s biggest companies have held up well with many putting on impressive gains while all around have fallen. The FTSE Aim 100, which constitutes the borse’s leading 100 shares, is the only broadly based UK equity market index to have risen in the past six months.

Since August, the FTSE 100, FTSE 250 and FTSE SmallCap indices have all fallen. In contrast the FTSE Aim 100 has risen about 1%. At first flush this jars with the traditional logic that blue chips do better than small caps during bear markets. But further inspection reveals that the FTSE Aim 100 is a completely different beast from the rest of Aim.

The index’s heavy skew to the still-booming resources companies sets it apart, as does the size of its constituents, many of which are large enough to be in the FTSE 250. This part of the market also has the unique benefit of sitting on sizeable cash balances after some huge fundraisings in 2007. The heavy overseas exposure is an added plus giving some immunity to the recession fears stalking the US and Europe.

The outperformance of the FTSE Aim 100 has been broadly spread and not just dominated by a few shooting stars. Almost half, 43 to be exact, of the index’s constituents have recorded gains since August. To help you find the future winners we’ve taken the analysis of this 43 a step further, zooming in on companies that have also outperformed the Aim 100’s 11% gain since late January. This leaves 24 shares with real momentum.

Out of this short list, the Shares team have picked out their favoured buys. These are oil companies Sibir Energy (SBE:AIM) and Afren (AFR:AIM), together with rig refurbishment specialist Lamprell (LAM:AIM). We highlight gold producers Centamin Egypt (CEY:AIM) and Avocet Mining (AVM:AIM) as the hot mining picks. Meanwhile KSK Power Ventur (KSK:AIM), a developer of power stations in India, remains in buy territory as does palm oil producer M.P. Evans (MPE:AIM), a beneficiary of soaring soft commodity prices.

Playtech (PTEC:AIM), a provider of software to internet gaming companies, is a solid play on the online betting boom having quickly replaced revenues lost following the collapse of the US market. You may be surprised to find a property company among our picks, but Northern European Properties (NEPR:AIM) is invested in Russia. Here the story is very different from the US and European real estate markets. Yields are high and falling, driving up property values, and rental growth helped by a booming Russian economy.

The short list

To illustrate how well the companies on our short list have done, 18 out of the 24 have not just gone up since August but are also up since mid July ahead of Aim, along with all other equity markets around the globe, taking their first big hit as the implications of the credit crunch sank in. The FTSE Aim All-Share hit its 2007 high on 16 July and since then is down by 18%. The performance of companies like KSK (up 88% over the period) and Afren (70.5% higher) makes these companies look as if they are in parallel universes.

Some of these exceptional performances can be put down to bid activity (Omega Insurance (OIH:AIM) is currently in takeover talks) but there are other factors setting them apart from the rest of Aim and the main market.

One of key drivers is the strong presence of resources companies. If you top slice the FTSE Aim 100, the index’s largest 20 players, Aim’s mega caps, are dominated by oil and gas, and mining firms. As a whole, the mega caps’ weighting in the FTSE Aim 100 comes in at 34%, and around half, or 17% of this weighting, is linked to the resources sector. By linked, that’s either directly – oil & gas producers (5.7%) and mining (8.5%) – or indirectly as is the case with the oil equipment, services & distribution sector (2.7% of the FTSE Aim 100). Aim’s biggest company is Sibir Energy, an oil producer with a £2 billion market capitalisation. But the story is not just all about resources.

Many companies in the FTSE Aim 100 are sitting on sizeable cash balances. Last year was a record for Aim raising money. Almost twice as much cash (£9.6 billion) was collected in secondary fund raisings than had been in 2006 (£5.7 billion). While the amount of money raised through floats fell as the number of new issues dropped off, fund managers showed a continued willingness to bankroll existing companies. In each of April, May and June more than £1 billion was raised through the secondary market, a trend which continued right through to the end of the year with £974 million raised in November.

Analysts at broker Seymour Pierce estimate that by June last year 31 of the 50 companies making up the FTSE Aim UK 50 (the biggest UK-domiciled companies on Aim, many of which are also in the FTSE Aim 100 index) were sitting on net cash positions. A strong balance sheet cannot be underestimated in the current climate – while central bank rates may be falling, anecdotal evidence is that the actual cost of credit is rising fast. Corporate borrowers tend to have to pay a premium to the London Inter-Bank Offer Rate (LIBOR) which remains stubbornly high. In addition to fewer funding worries, Aim companies with net cash are getting good deposit rates.

Cashing in

Many of Aim’s mining companies are loaded up with cash, examples from our short list include Avocet Mining, which had a net cash position of $110 million as of 30 September 2007. Centamin Egypt is in an equally strong position having raised CAN$100 million in November via the issuance of new shares on the Australian Securities Exchange.

The Aim market as a whole has seen plenty of foreign firms getting a quote in recent years and now more than 20% of all companies (345 out of a total of 1,693) are overseas domiciled. But the concentration of overseas businesses in the FTSE Aim 100 is even greater. A lot of the foreign companies that joined the market were already established in their home markets – they didn’t arrive on Aim as fast-growing upstarts. Many mining companies from Canada and Australia, already major public companies back home, have tapped the resources appetite of London’s investors via dual a quotation on Aim.

Out of our list of 24, about a third, or eight, are overseas domiciled. Much of the overseas element is from the resources contingent so that they are overseas is incidental to the fact that the mining and oil & gas sectors have been performing well. But there is another strand to this story in that foreign companies are less dependant on the fortunes of the struggling US and European economies. Steppe Cement (STCM:AIM) is a case in point. A Malaysian-based company producing cement in Kazakhstan for the Kazakhstani market, Steppe is tapping into a localised construction boom Northern European Properties, exposed as it is to the Russian property market, is another good example.

You only need to look at the testing performance from the rest of Aim and the mid and small caps on the the main market to see how recession fears are taking their toll. As a rule the smaller and mid cap companies tend to be more focused on the UK economy. In the small company space there is a mass of service businesses (support services sector) while the FTSE 250 has a heavy weighting of house builders, construction firms and general retailers. These are precisely the kind of companies reeling as fears take hold of a house price slump following on from a tightening up of credit and the consequent impact on consumer spending. Since August the FTSE 250 and FTSE SmallCap are down around 4% and 13% respectively, meanwhile the FTSE Aim All-Share is off about 5%.

The reason why the FTSE Aim 100 has beaten the FTSE 100 (down around 1% since August) is mostly do with the latter’s exposure to the banks. But the FTSE 100 did have have the advantage of changing investor sentiment in favour of the larger, more stable, companies found among the blue chips. Comparable companies, such as the consumer non-cyclicals like food producer Unilever (ULVR) or telecoms giant Vodafone (VOD) don’t exist on Aim.

The Aim silver lining

Aim is not all about small fast-growing companies. There are many mature businesses at the top of the market. Naturally, an exposure to the resources sector has helped the FTSE Aim 100 segment of the UK equity market perform well and actually rise in the past six months while every other index has fallen. An international flavour means the companies in the FTSE Aim 100 aren’t necessarily at the mercy of the recession fears stalking the UK and American economies, meanwhile unusually high cash balances are a big plus in the post credit crunch world. Here is one true bright spot amid all the gloom.

Moving on up

Many of Aim’s biggest companies have moved to the main market. Recent examples include International Ferro Metals (IFL), Imperial Energy Corporation (IEC), New Star Asset Management (NSAM) and First Quantum Minerals (FQM). Out of the current FTSE Aim 100, Peter Hambro Mining (POG:AIM) and Lamprell (LAM:AIM) have plans in motion, and Aim’s largest company Sibir Energy (SBE:AIM) is reportedly considering making the jump. For these companies a key reason for moving is that a main market quotation broadens the investor pool. Most the City’s main stream fund managers are not allowed to invest in Aim and if they are, are only permitted to invest a small proportion of the fund, perhaps 10%.

Any company which has a market capitalisation of more than £100 million (the majority of FTSE Aim 100) will qualify for inclusion in the FTSE All-Share index once on the main market. Inclusion triggers automatic buying by the tracker fund managers, who collectively own about 10% of the All-Share. But using this as a trading strategy is far from proven as recent Aim to main movers have failed to persistently outperform. Any additional buying pressure from the trackers has been drowned out by the wider volatility.

Our Aim 100 Picks

Afren (AFR:AIM)

Market Cap: £348.1 million

Last week the company completed the $205 million acquisition of Devon Energy’s assets in Ivory Coast. The deal increases Afren’s existing 2P reserve base by 67% to 70 million barrels of oil equivalent, and offers immediate production and cash flow. The west African explorer is still due to commence production in April from its Okuru-Setu marginal field development project in Nigeria – with output anticipated to reach around 20,000 bopd by the middle of the year. This, combined with an aggressive 2008 drilling programme and a board which includes a former head of Opec and current adviser to the Nigerian government Dr Rilwanu Lukma, adds up to a pretty attractive picture. (TS)

Avocet Mining (AVM:AIM)

Market Cap: £236.9 million

The south east Asia-focused gold miner is hard at work since a recent restructuring, with plans to expand producing mines in Malaysia and Indonesia. Another project, Bakan, starts production next year. Avocet is cash-rich and seeking new projects, having recently secured the right to earn 80% of an advanced gold exploration target in Kalimantan. With the gold price continuing to strengthen, Avocet is in prime position to benefit from investor interest in the precious metal. Chief executive Jonathan Henry is highly respected in the mining community and is more than capable of helping Avocet become a much larger gold producer within the next few years. The 2008 PE of 17.7 is 28% higher than the mining sector average, but a justified premium rating due to growth prospects. (DC)

Centamin Egypt (CEY:AIM)

Market Cap: £685.7million

The company’s Sukari project is one of the world’s biggest gold deposits not owned by a major producer. Centamin continues drilling on the site to prove up the resource. House broker Ambrian believes the results so far suggest Centamin will eventually have 15 million ounces of gold. The first stage of production is scheduled for Q4, 2009. The sheer size of Sukari makes Centamin a firm bid target, but takeover interest may not truly emerge until it has commissioned the first part of the mine, as this is when the development risks are reduced. Egypt should become a popular place for miners, as there are believed to be numerous pockets of untapped land rich with natural resources. Centamin is already ahead of the game. (DC)

KSK Power Ventur (KSK:AIM)

Market Cap: £656.0 million

The shares in the Indian developer of power stations have rocketed, rising 190% in a year from 173p to the current 503p. The company operates in a sector, Indian energy, that is growing following the massive expansion of the Indian economy. The share price has been sustained by soaring profits and sales, as KSK keeps adding new power plants in India to the portfolio. These are financed by the company through non-recourse project debt, and the power is sold directly to industrials at a high margin through juicy agreements. KSK is tied up with Lehman Brothers in a JV that has just been reorganised, and the shake up will result in more equity raised by KSK in India. Profits should continue growing. (CS)

Lamprell (LAM:AIM)

Market Cap: £848 million

The Dubai-based firm refurbishes old and builds new rigs for operators in the Middle East. It has announced its intention to graduate to a full listing by the end of the year which would in all likelihood see it become a FTSE 250 company. The most recent outlook statement was bullish, suggesting full-year results later this month could add to the momentum. An already strong orderbook will grow even further if three options worth $180 million each and three options worth $220 million each are exercised by Scorpion Offshore and Seajacks International respectively. (TS)

M.P. Evans (MPE:AIM)

Market Cap: £258.2 million

Richard Lucas of independent broker Ambrian has once again recommended M.P. Evans as one of his picks for this year. He believes that the 2007 results – to be issued next month – will be ‘excellent’. More importantly the outlook is encouraging. Profits growth this year should be ‘impressive’. The price of palm oil should remain strong helped by the growing popularity of biofuels and the strength of soft commodities. In addition the company will benefit from the fact that its plantations are relatively immature, which should lead to strong volume growth. Apart from this growth there should also be some recovery by the Australian cattle operations. (JM)

Northern European Properties (NEPR:AIM)

Market Cap: £423.5 million

The shares in the real estate group have jumped almost 30% since the start of 2008 to their current €0.91 level. The company invests in the Nordic and Baltic regions, but it is also broadening its focus in Russia which holds great potential. The Russian market is growing rapidly alongside its economy and a combination of rental increases and further yield shift is likely to provide attractive returns to shareholders. Since joining Aim in November 2006, Northern European Properties’ portfolio has expanded substantially, while a number of property disposals have further strengthened its cash position. As at 30 June 2007, it had €377.7 million in cash. (RR)

Playtech (PTEC:AIM)

Market Cap: £856.7 million

The online gaming systems provider gets royalty fees from software licences. Analysts reckon it has a good chance of diversifying interests, including expansion into the server-based gaming market and cross-selling new gaming products to existing customers. It has around 55 licensees and powers over 200 casino, poker, bingo and skills gaming websites. Investment house Jeffries calls Playtech a momentum play on the fast-growing online gaming sector. It says the fast speed in which Playtech has replaced US revenues (after online operators were forced out of the country in 2006) demonstrates 'huge unaddressed demand' in Europe and Asia. (DC)

Sibir Energy (SBE:AIM)

Market Cap: £1,985 million

The company is currently laying the foundations for an extremely aggressive drilling programme on its Koltogorsky licences in western Siberia. It is by some distance the largest oil and gas firm by market capitalisation on Aim, but as yet there is no indication as to when Sibir will make its much mooted move to the main market. Production was increased by 80% last year to 48,900 bopd and is expected to top 60,000 by year end. Alongside its growing upstream business the group also has a share in downstream operations in the Russian capital. Last year turnover equalled more than £343 million. (TS)