The growing absurdity of the disparity in value between Germany’s over-hyped Neuer Markt and London’s generally under-valued Alternative Investment Market (AIM) is reflected in the fortunes of Fayrewood Plc, the Watford, Hertfordshire, UK-based IT products distributor. Fayrewood is a holding company that invites the owners of well-run European operations to unlock the value of their business by joining the Fayrewood organization and then carry on running their own businesses.
However, Fayrewood is listed in London, where despite earnings growing at the rate of 20% annually, the shares are currently rated at only 25 times earnings. However, in July, the company’s German subsidiary ComputerLinks, which it bought for 3.2m pounds ($5m) in 1997, was floated on the Neuer Markt. The shares were 20 times over-subscribed which currently puts a value of 40.8m pounds ($64.8m) on Fayrewood’s 53.3% remaining holding in the operation.
Based on the current price of ComputerLinks, Fayrewood’s holding in the German operation is worth 1.42 pence for each Fayrewood share. With the current Fayrewood share price of 160 pence, this means that the rest of the group is worth just 18 pence a share – even though Germany contributes only around 50% of pre-tax profit.
Managing director Paul Griffiths is philosophical about the difference and diplomatically suggests that the Neuer Markt might just be over-valuing stocks while AIM takes a more conservative view. The issue is far from academic however since Fayrewood is an acquisitive beast and is currently scouting Spain, Italy and Scandinavia for the kind of company that will fit into its organization. Clearly, the value of its paper will make a considerable difference to the price it pays.
Fayrewood’s progress is difficult to fault with net income up 53.1% to 1.3m pounds ($2m) on revenue that increased 125.6% to 117.1m pounds ($186.1m). Given that Fayrewood is up against global distributors such as CHS, Ingram Micro and Tech Data, it is some feat to hold your own against competitors prepared to shrink margins to microscopic levels.
