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Geometric Drilling - UK Based onshore drilling contractor

Interview with Tim Feather, Hanson Westhouse

25 September 2008

Tim Feather, the mild-mannered AIM Nomad and director of advisory and broking firm Hanson Westhouse, believes that volatile conditions are helping to highlight some of the market’s success stories as well as its numerous failures.

Having said that, Feather is in no doubt about the current challenges faced in the market. “It’s a difficult time to be an AIM Nomad,” he says. “And on the broking side, the markets are pretty much shut at the moment which means that getting out there and raising money for people is very difficult.”

As for the companies themselves, Feather expects some disgruntled PLCs to ditch their AIM listing altogether after an extended period of feeling hard done by and seeing no advantage hanging on to a listing.

“With costs of around £100,000 per year for no perceived benefit, except the kudos of being quoted, I think the exodus will speed up over the next few months. If these companies can’t raise money and are getting no credit for any good things they’re doing, they will come to a point where they think ‘what is this quote actually doing for me?’ I think there are probably quite a few companies in that position.”

Every cloud…

But while tough conditions are making it difficult for a number of companies to raise new money, there are others who are toasting the benefits of a place on London’s junior market. Feather points to Hanson Westhouse broking client Pure Circle Limited, as one example.

The food ingredients business has seen its share price rise from 170p on listing in December 2007 to around 220p on the back of a stream of good news about its core food and drink sweetener, Reb-A.

“You’re seeing a dividing line between successful companies and unsuccessful companies,” Feather says. “For those that haven’t delivered, it could be game-over as far as being a public company. It’s a big step to de-list because you need to consider the external shareholders who are likely to lose any ability to trade the stock. The alternative of being taken over needs someone to come up with the money, which is not easy at the moment.”

With some companies suffering, Feather says that the many in the Nomad community will be feeling the effects as well. “The results from most of the quoted Nomads show how difficult the market is and I think it will be a while before it gets much better. We’re quite fortunate because even though we’re not having as good a year as last year, we have some very strong corporate clients which have performed well and made money for our institutional clients. We have focused particularly on resources, although not to the exclusion of other sectors, and we’re well placed in oil and mining, and they have been two of the areas where people have been more interested.”

While he admits the oil and gas and mining sectors pose their own unique challenges to advisors, Feather says most of the issues stem from the inherent risks the companies face.

He explains: “With markets as they are, it’s difficult to get people interested with just words – they need tangible evidence of success, they need numbers, they need third party verification and ultimately they need minerals out of the ground. There aren’t that many AIM companies actually doing that. There’s a lot that say they are going to do it, but it can be a long game.

“For example, developing assets in the North Sea is both risky and long term,” he says. “We act for EnCore Oil, which has a large portfolio of assets in the North Sea. One of the major assets is a gas storage project which is potentially very valuable, but the market is being relatively cautious about valuing it until the viability is tested, which is about to happen.”

Another of Feather’s oil and gas clients is Nighthawk Energy plc, which has a portfolio of onshore US assets. The firm floated the company early in 2007 at 25p per share, a price that rose to 115p and is now sitting at around 65p.

“They have bought into six projects since IPO, a couple of which are looking stunning – potentially huge oil reserves,” Feather says. “On some of the projects the wells will be put on production and they’ll do five or ten barrels a day but they’ll do it for decades. It’s hugely profitable and they pay back very quickly. The oil and gas is all quite shallow and you know it is there – it’s the opposite of drilling in the North Sea. With zero political risk and high oil prices, the climate is very favourable.”

Feather currently looks after 16 companies, of which nine retain the firm as both Nomad and broker and the rest as either Nomad or broker. As a Nomad operating under AIM’s rules, his duty is primarily to the exchange and then to his clients. Managing conflicts of interest is a core part of the Nomad role, but Feather says this can still lead to tricky situations.

“The issue of responsibilities can be difficult, particularly if you’re Nomad and broker. If you’ve taken a company to market, raised some money for it and put your institutional clients in to it, you feel an obligation to remain in place even where things have gone seriously wrong. If you walk away, you may be condemning that company to losing its listing.

“Set against that, and overriding it, is your responsibility to the exchange and your ongoing obligation to be satisfied as to the suitability of a company for listing. There’s a distinction between being suitable for listing and simply being able to comply with the rules. We’ve had companies that are of no interest to most investors but they have been complying with the rules. The definition of what is suitable for listing isn’t all that clear.”

Feather’s point is all the more critical at a time when AIM is bearing down on the Nomad community, although he points out that the exchange has always had a good grip on the system, particularly because of its reliance on Nomads is a core feature.

“The AIM team has certainly become more proactive in the way it regulates, and rightly so,” he says. “With the nature of the companies on the market, there are bound to be issues from time to time and AIM now has a dedicated team focused on investigating breaches of the rules.

“I also think that AIM is conscious of people watching it. For example, when Nasdaq was trying to take over the exchange, there was a comment that AIM was like the Wild West. AIM is actually performing a very good role providing access to capital for some excellent companies. It is much more flexible than other markets which is what is needed by the growth companies it is trying to attract.”

Ben Hobson, SmallCapNews.co.uk