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FE Alpha Manager Wotton: The three exciting small-cap IPOs you might have missed

11 April 2017

Ken Wotton, manager of the Wood Street Microcap Investment reveals his three favourite small-cap IPOs of recent years.

By Jonathan Jones,

Reporter, FE Trustnet

Filta, Gamma Communications and Xafinity are among some of the best new UK listed-companies over the past few years, according to FE Alpha Manager Ken Wotton.

Backing IPOs of smaller companies can be a risky business for investors, with little track record to go on and (usually) unheard of niche firms vying to become the next big growth story.

Indeed, Wotton, who manages the five crown-rated Wood Street Microcap Investment fund, has seen his fair share since launching the fund in 2009.

His stockpicking ability has seen the £68.5m fund return 150.41 per cent over the past five years, emerging as the third best performer of the 43-strong IA UK Smaller Companies sector.

Performance of fund vs sector and Numis Smaller Companies ex IT over 5yrs

 

Source: FE Analytics

The concentrated portfolio of 42 stocks has a dividend of 0.7 per cent and a clean ongoing charges figure of 1.02 per cent.

Below, FE Trustnet looks at the manager’s top picks from those that have listed in the smaller companies space over the past few years.

Filta

The first is Filta, a £30m franchise business which launched on the Alternative Investment Market (AIM) in November last year.

“The proposition is that men in vans with a specialist piece of kit a bit like a vacuum cleaner with a filtration unit inside it take it to industrial kitchens and clean the oil of deep fat fryers,” the manager said.

“The drivers for the customer are food quality, first; secondly you replace your oil less frequently and therefore save money, there’s a regulatory driver. Lastly and most importantly it takes a quite difficult and potentially hazardous activity and puts it in the hands of a professional.”

Filta, which has around one third of its business in the UK and the rest in the US, rents the equipment to the franchisee who in turn hires the professionals to carry out the work, meaning the company itself requires a relatively low level of capital.

“It’s a really nice long-term recurring revenue model which builds without having to invest much capital at the centre,” he said.

As well as this, there remains room to grow. “It’s a really nice long-term recurring revenue model which builds without having to invest much capital at the centre,” Wotton noted, adding that there is currently no competition doing what they do.


The placing, which raised £6.2m and gave the company a market capitalisation of £22.4m was three-to-four times oversubscribed, according to Wotton and since its launch the company has risen 31.33 per cent.

Performance of stock since IPO

 

Source: FE Analytics

“Shares went up a lot pretty quickly because of the supply and demand of the deal but they’ve just had their maiden results plus first quarter trading and hit their numbers.”

The company, of which Wotton was a cornerstone investor at the time of the IPO, accounts for 5.22 per cent of the fund and is the largest holding in the portfolio.

Gamma Communications

Also among the best recent small-cap listings is Gamma Communications, which launched back in October 2014 and has a market capitalisation of £476m.

“It’s just a really good, high recurring revenue business with a good market position, a great management team and does the classic thing you should do of under promise and over deliver,” Wotton said.

The firm is a market leader in SIP Trunking, which are next generation ISDN lines for businesses and is among the first to adopt cloud PBX which is an internet-based phone system.

“Rather than having a big piece of kit in your building it’s all in the ‘cloud’ and you access it through the internet,” Wotton said.

“These are quite high growth areas of the telecoms market, which, overall, isn’t growing,” the manager added.


Since its launch to the AIM market, the telecoms company, which reported a rise in revenues but a slight fall in profits last year, has risen 157.84 per cent.

Performance of stock since IPO

 

Source: FE Analytics

The firm is a competitor to FTSE 100 constituent BT as it provides these products to service providers who sell them as an alternative to the hardware dependant phone line options currently available on the market.

“Their customers are those that would have typically resold BT lines or broadband but are using Gamma to service business customers – mainly SMEs [small and medium-sized enterprises],” he said.

“It’s well-positioned and is one of the market leaders in SIP Trunking and one of the leaders in Cloud PBX. They have had upgraded forecasts regularly since they floated in 2014 hence the rating has dramatically increased but we still think there are elements of it that are being undercooked in market forecasts.”

Xafinity

The final company is Xafinity, which the fund bought into at its float onto the London Stock Exchange in February this year.

“When this floated it was around £180m so it towards the higher end of what we focus on,” Wotton said.

“Xafinity is a consulting business that is focused on defined benefit pensions so it has actuary advisors whose clients are the trustees of these schemes.

“At first look you might think defined benefit schemes are a dying beast and they’re all being closed but there is a substantial amount of assets in these funds and there’s a 60 year run-off of the ones that you’ve currently got.

“So there is a really long period where they need valuations, accounting advice and various other things and at the moment, from an advisor’s point of view, there has been a boom in activity because as well as the recurring elements such as reporting, because of low bond yields and bigger deficits on some of the schemes a lot of them are having to do things to reduce the deficit.”

“It’s in the second tier of providers but the big players are expensive and short on quality of service so there is a second tier which is competing to win mandates away from the larger players and are taking market share.”

The company has made a strong start to its publicly-listed life, rising 9.58 per cent since February.

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