Fintech stock Alfa Financial Software Holdings (LSE: ALFA) isn’t a household name. But shares in this asset finance software business have doubled over the last year and are rising today, up 13% as I write.
Investors are cheering Alfa’s latest financial results, which show underlying profits up 22% during the first half of the year. I’ve been taking a look to see if I’d like to add this very profitable business to my portfolio.
A strong performance
Alfa makes software that’s used by large automotive companies and other customers for asset finance, such as car loans. A key selling point is that Alfa’s software can replace multiple third-party systems, providing a single platform to track loans, funding, and repayments.
Today’s results show that revenue rose by 12% to £41.1m during the first half of the year, excluding the impact of currency rates. Operating profit for the period was 22% higher, at £11.4m.
The group continued to win new business and the total value of its current order book rose by 30% to £125m. Alfa’s net cash balance also rose by 35% to £50m during the half year. This is more than needed, so the company plans to return £30m to shareholders through a special dividend of 10p per share.
Expensive but good?
I think Alfa has many of the characteristics I look for in a high-quality business.
Like many software businesses, Alfa is gradually switching its customers from standalone licensed products to subscription services. The company’s latest platform — version 5 — is cloud-based and management say that a growing number of customers are signing up for this upgrade.
Subscription revenue now accounts for 28% of revenue, up from 20% one year ago. I expect this to continue rising, providing reliable, predictable cash flow.
Another attraction for me is that profit margins are very high. Alfa’s latest numbers show an operating profit margin of 28%. That’s in line with the group’s historical performance. High margins generally drive strong cash generation. This allows a business to fund internal growth without needing much debt — that’s good for shareholder returns.
Where next for this growth stock?
I can see a lot to like about Alfa. But even the best company is only a good buy at the right price. Are Alfa shares still cheap enough to buy? I’ve been crunching the numbers.
Management now expects full-year revenue to be around 4% higher than previously expected. My sums suggest that this still leaves the stock trading on around 26 times forecast earnings.
In addition, shareholders are set to receive a 10p special dividend in addition to the company’s regular 1p annual payout. With the stock at 178p, that gives Alfa a useful dividend yield of 6% for the current year.
The main risk that concerns me is that the company is heavily dependent on contract renewals and new customer wins. If work is delayed or cancelled — as we saw in 2019 — profits can fall well below expectations. Failure to convert enough customers to subscription services could also hit profitability.
I’d like to do more research on this business. But if everything checks out as I expect, I would consider buying Alfa shares for my portfolio at current levels.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.