From the coalface: proactivity is key in this crisis

7 mins. to read
From the coalface: proactivity is key in this crisis

While market participants are looking for clarity on the Covid-19 situation, there is still plenty that company management teams can do in the meantime, argues John Beresford-Peirse, Director of Corporate Finance at Hybridan. 

Global stock markets have been on a roller-coaster ride since 21 February, the final trading day before news emerged of a dramatic increase in COVID-19 cases in Northern Italy, prompting investors to embark on one of the biggest and quickest sell-offs in history.

The AIM market initially fell a greater amount than the Main market, plunging 39% to its low on 18 March, compared to a decline of 34%, but has since then rebounded by a hugely impressive 26% to 16 April, relative to 14% for the Main market, placing AIM firmly back in bull market territory – defined as a rally of over 20% from the low point – and putting a cap on an extraordinary eight weeks of trading.

As with the big cap arena, the AIM and general small-cap ecosystem has been working hard to adapt to the new state of uncertainty with regulators, companies, investors and advisers doing their utmost to ensure the smooth functioning of the market and that all stakeholders are updated.

The AIM Regulation team at the London Stock Exchange has, for example, granted companies whose financial year ends between 30 September 2019 and 30 June 2020 a three-month extension to the normal six-month annual reporting deadline, if it would assist in producing a report and accounts that show a truer picture of the situation.

Other measures include providing AIM companies and their advisers more leeway in requesting a temporary suspension of trading, if it is judged that a company needs more time to make a fully compliant announcement to the market. For companies already suspended, whose shares would normally be cancelled after six months of suspension, the regulator will consider granting a further six months for any company suspended between 30 September 2019 and 30 June 2020.

These measures, and others introduced by the Financial Conduct Authority that primarily concern bigger cap stocks, are of course in addition to the many introduced by the government last month in order to help shore up company balance sheets and protect jobs during the crisis.

AIM companies themselves have largely been proactive with updating the market about how the crisis is impacting them and may in the future affect their performance. Most have by now released a COVID-19 update, with many retracting market forecasts until the situation becomes clearer, while others have suggested performance will be negatively impacted.

As always in times of crisis, there will be winners and losers. We believe winners will be in sectors including technology, IT, life sciences, online retail, insolvency practitioners and food production companies. Losers will be in the leisure, travel, bricks and mortar retail, property, and airlines sectors, to name a few. Those companies that are cash generative with lowly geared balance sheets will be more secure.

We are in general looking towards the large and varied life science sector not only as a likely winner in these times, but also as our salvation. Healthcare is going to take us out of this pandemic in the form of widespread testing technology, and the development and manufacturing of a vaccine. Indeed, preparedness for future pandemics will now surely assume greater global importance.

Unsurprisingly, of the companies that have published a COVID-19 update, a good portion have said they will cut or reduce their dividend, and a recent forecast by Link Group suggests that dividends from UK companies will decline by as much as 53% in 2020. Many companies have also said they will be looking at financing options, including equity, debt or a combination including the government’s COVID-19 related schemes. Given the relatively lower level of most share prices at the moment, more creative means of financing such as convertible loan notes may see greater usage.

Investors have remained very active in terms of trading levels throughout the crisis, meanwhile, with market makers such as Winterflood Securities, the biggest trader of AIM stocks, and Peel Hunt, suggesting volumes have been exceptionally high. This suggests investors are seeking out value, perhaps taking on board the Warren Buffet adage that investors should “be greedy when others are fearful.” What they may not be doing, however, is holding on to gains, preferring to rapidly bank profits when liquidity permits to cover losses elsewhere, meaning it can be difficult for companies to hold on to gains in the current markets.

Institutional investors are similarly not averse to a bargain, particularly when it comes to placings, of which there have been over 30 since the middle of March. AIM companies including Hotel Chocolat Group plc, Everyman Media Group PLC, FireAngel Safety Technology Group plc and City Pub Group PLC have in the past weeks sold new shares at prices ranging from 30% to 75% below their pre-crisis levels.

Despite the discounts typically on offer, institutions are tending to support companies they already own shares in, choosing not to back new companies. Some of this reticence may be connected to the fact that they do not wish to invest in a company in which they have not physically met the management. Likely dividend cuts are also weighing on the attractiveness of new issues to institutions that are keen to protect cash reserves.

IPOs, which we track daily for our Small Cap Feast market update, are largely being postponed until more normal conditions return. Indeed, the cupboards are looking very bare in Hybridan’s IPO Kitchen, a round-up of all forthcoming IPOs and reverse takeovers that makes up part of our daily Feast. However, we expect that businesses that want to press on with their plans will resurface and those that don’t need to raise money at IPO will consider a straight Admission to market.

While institutional investors may be somewhat more selective in their approach at the moment, they do perhaps have a little more time on their hands so are not averse to being introduced to new companies via video or conference call on a “non-deal” basis, meaning this period need not be completely lost to management teams keen to more widely disseminate their story to the investment community. The most proactive companies we are seeing are not sitting back waiting for the uncertainty to end, but are instead approaching investors with a credible story for growth capital or updating investors in a non-deal capacity that they are still busy and still investing for future growth. Those companies will be most rewarded by the market when the lockdown ends.

It’s important to note, particularly for AIM companies, that any investor outreach programme should include retail investors, who regularly make up the majority of AIM shareholder registers. Often overlooked, managements ignore them at their peril, both in terms of raising capital and disseminating their investment stories more broadly. This is especially the case with fewer institutions now actively investing in UK small caps below £100 million in market capitalisation for regulatory and liquidity-related reasons. Evidence also suggests that large numbers of retail trading accounts are currently being opened as individual investors seek to take advantage of lower share prices, providing a further compelling reason that this is an investor audience that managements should engage with.

Placings and investor meetings have kept brokers busy during this period, with other advisers including lawyers, accountants and PRs similarly occupied meeting their clients’ ongoing needs. While some deals and transactions have been postponed, the new working from home culture appears to be so far keeping the market largely functioning, albeit in a different way.

Our advice to small cap management teams is fourfold:

  1. Stay flexible when it comes to pricing new equity issuance, or if the discount needed in order to raise the required amount is too deep, consider other forms of financing including convertible loans.
  2. Don’t give up in the quest to introduce your story to new investors, as it is a worthwhile exercise to ensure it is on the radars of new potential investors, and some may even buy in the market at the current lower levels.
  3. Ensure all possible pools of capital are approached, both professional and retail, in the latter case potentially utilising one of a number of platforms that specifically exist to service this audience.
  4. Make sure any available tax efficient structures such as Enterprise Investment Scheme and Venture Capital Trust eligibility is obtained, given that this is one area of the market that is certainly still investing.

Ultimately, market participants like everyone else are waiting for news on a vaccine, the lockdown to be lifted and for greater clarity to emerge on the economic impact of the COVID-19 crisis, but there is still plenty that company managements can do in the meantime, with prudence suggesting that taking measures on all fronts sooner rather than later will be the correct strategy.

About John Beresford-Peirse, Director of Corporate Finance at Hybridan

John has over 12 years’ of broking experience, primarily in UK markets, and previously worked at Loeb Aron & Co., Westhouse Securities and Jefferies International. He has helped numerous companies in sectors including natural resources, transport, technology and capital goods to raise equity and debt capital, and broaden their investor base. John is part of the team structuring IPO and secondary transactions and has a wide network of investor contacts. He has an MBA from Cass Business School.

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