Six AIM shares to survive a stockmarket sell-off

Stockmarkets have been weak in recent weeks so this is a good time to consider more defensive investments on AIM.

These are companies that have an underlying value and strong balance sheets. They should be generating cash from their operations and ideally paying dividends. A growing business is also preferable but steady growth, rather than heady growth expectations that may not be achieved, tends to be best. If the company has been quoted for many years there should be a track record of achieving expectations. These are not necessarily shares that soar in the good times but they make steady progress.

There has to be some sort of base for the share price. It is no good if the company has no profit or revenues and its share price is based on optimism about potential many years into the future. Those companies are the ones that are likely to head rapidly lower in the bad times.

If there is a sharp downturn then the share prices of more defensive companies could go down as well but the fall will be much shallower than for many other shares and many of these companies have shown that they can recover relatively quickly. This means that some of them do have quite high ratings to reflect the quality of their records. Many of these more defensive shares are sought after for inheritance tax (IHT) portfolios so they are in demand and this keeps the rating up.

Here are six companies that are worth considering as defensive investments although they vary in risk and valuation level.

James Halstead (JHD)

418p

Floorcoverings manufacturer James Halstead was originally quoted on the Main Market and moved to AIM in 2002, so it has a long track record as a quoted company. The family-run business has been manufacturing floorcoverings for more than a century and it has managed to cope with many economic and market downturns during that time. The Manchester-based company is increasing its share of the commercial flooring market and further progress is expected this year even though the strength of sterling makes things more difficult. The UK accounts for one-third of revenues with Europe and Australia the other important markets as the company invests in international growth.

The balance sheet is strong with net cash of £46.5 million at the end of 2014, although there is a gross pension deficit of £20.1 million. The interim dividend was raised by 5% to 3.142p a share, which continues four decades of dividend growth, and the total for the year is expected to be 11p a share. There may even be a special dividend in the future. A 2014-15 profit of £43.7 million is forecast, rising to £45.9 million in 2015-16. That puts the shares on 25 times prospective 2015-16 earnings but this reflects the demand from investors for the shares.

Nichols (NICL)

1,404p

Like James Halstead, soft drinks manufacturer Nichols was previously on the Main Market and it has a long track record. Merseyside-based Nichols supplies Vimto soft drinks, as well as brands such as Sunkist, under licence. The Middle East is an important market and international markets make a similar contribution to revenues as the UK. In recent years, Nichols has managed to grow revenues and profit margins. At the interim stage, revenues were flat at £54.7 million but underlying profit rose from £10 million to £10.9 million.

Sugary drinks have a negative image but Nichols is already selling more reduced sugar drinks and the international nature of the business also helps. In fact, the latest acquisition is the Feel Good brand of juice drinks with no added sugar, which can be marketed in the UK and internationally.

An improvement in pre-tax profit from £25.7 million to £27.9 million is forecast for this year, rising to £30 million next year. The shares are trading on just under 22 times 2015-16 prospective earnings. There has been consistent growth in dividends and they are expected to reach 24.4p a share this year and 26.4p a share in 2015-16. That reflects the track record and the potential value of the brand to an acquirer.

Personal Group (PGH)

522.5p

Employee benefits provider Personal Group Holdings has historically been a steady business with a focus on generating income from selling health benefits, such as hospital plans. A range of other employee benefits was offered but most of them were provided by third parties and did not generate any income for Personal. New management has acquired Lets Connect, which provides salary sacrifice schemes enabling employees to acquire computers and smart phones, and most recently mobile virtual network operator shebang Technologies Group. The renamed Personal Group Mobile (PGM) has a relationship with Three, which enables the business to gain access to the network at wholesale cost. This means that airtime can be provided with smart phones supplied by Lets Connect. These acquisitions provide additional growth on top of the solid base of clients.

Personal Group has been growing its dividend for well over a decade and the quarterly dividends should total 20.9p a share this year. A 2015 pre-tax profit of £10.6 million is forecast but it is next year that recent acquisitions start to fully contribute. A profit of £15.3 million is forecast for 2016, which puts the shares on 13 times prospective 2016 earnings.

HML Holdings (HMLH)

42p

Residential property management services provider HML has grown organically and through acquisition. Private renting is a growing part of the housing market. As demand for housing remains strong this is leading to the construction of residential blocks thereby providing management opportunities for HML on top of winning contracts for existing blocks.

Increased regulation of HML's market is likely to lead to consolidation and HML is in a good position to prosper. The company already has a strong position in London and it has been expanding outside of the capital. HML did fall into loss at the end of the last decade during the economic crisis but it is a much larger business with 51,000 units under management providing solid recurring revenues with additional revenues from insurance broking.

Profit growth is set to be steady and a rise from £1.5 million to £1.7 million is expected in the year to March 2016, with further improvement to £1.8 million next year. HML is generating cash and could move into net cash in around one year but further acquisitions are likely. The shares are trading on less than 12 times 2016-17 prospective earnings.

NAHL (NAH)

355p

Personal injury claims appear to be one of the areas of the economy that continues to grow whatever else is happening. NAHL Group, which operates The National Accident Helpline that provides leads to solicitors, will continue to benefit from this. This is a cash generative business with solicitors paying for the lead straight away and net debt was £1.2 million at the end of June 2015, following an outflow of £3.5 million on the purchase of the Fitzalan conveyancing leads business and the payment of the final dividend for 2014. This year's dividend should be around 18p a share.

The conveyancing business is dependent on the state of the house buying market. However, its market share is small so there is potential for growth even in a poor market and it is still a small part of the group.

The share price has soared from last year's placing price of 200p a share even though many of the original shareholders have sold their stakes. The shares are trading on 13 times prospective 2015 earnings and the forecast yield is 5%.

Fulcrum Utility Services (FCRM)

17.88p

Fulcrum Utility Services is different to the other companies in that it does not have a good looking track record but new management has improved efficiency and turned the business around. Fulcrum connects buildings to the gas network and has diversified into connections to the National Grid - rivals do not offer both gas and electricity connections. There are more than 1,200 clients and this is growing as Fulcrum diversifies from commercial sites to housebuilding. The medium-term outlook for construction remains positive and there is little need to increase overheads as the business grows.

Repeat revenues are already more than 50% of the total of £33.7 million, which fell last year as Fulcrum focused on higher margin work. Fulcrum is investing in pipeline assets, which currently generate annual revenues of £1 million. This will provide a growing income stream as the portfolio of pipelines grows. Fulcrum has won a £3.95 million contract to connect a number of adjacent distilleries to the Scottish gas network via a 13km pipeline so they can reduce costs by switching from fuel oil.

Net cash was £5.6 million at the end of March 2015 and the maiden dividend of 0.4p a share has subsequently been paid. Profit is expected to double to £2.4 million in 2015-16 and grow to £3.3 million in 2016-17 when the prospective earnings multiple falls to nine. There is a good record of retaining customers but be aware that the framework agreement with British Gas comes up for renewal in November.