Alpha Financial Markets Consulting (LSE: AFM) only became a public company in October, so it flies under the radar for most investors. However, despite the company’s age, I believe that it has a bright future.
Alpha provides consulting and related services to clients in the asset and wealth management industries. The company already works with 80% of the world’s largest asset managers providing services such as advice on compliance and regulation, mergers and acquisitions, IT solutions and marketing. Put simply, Alpha is a one-stop shop for financial companies’ business management.
The current environment is perfect for businesses like this. Financial firms are spending an ever-increasing amount of time dealing with regulators’ demands and, at the same time, competition is forcing fees down across the sector. Companies are having to do much more with less cash, which is pushing them towards corporations like Alpha that can meet all of their needs at a much lower cost than setting everything up in-house.
Explosive growth
Today the company has reported its first set of figures as a public company for the six months to the end of September (before its IPO in October).
For the period, the firm reported revenue growth of 50% and gross profit growth of 59% to £10.5m. Adjusted earnings before interest, tax, depreciation and amortisation jumped 71% to £5.8m. This is apparently the “most successful six-month period in our history“, and shows how Alpha is profiting from the rising demand for outsourced ancillary services in the financial sector.
Following the IPO, Alpha has been able to pay down its net debt pile of just over £85m, giving it scope to reinvest heavily in expanding its business. Management is targeting the US and Asia as key areas of expansion.
As part of this drive, the group’s first office was opened in Asia this year and management has increased the number of consultants working in the US by 33%, which has helped drive a 100% improvement in revenue. Together, the US and Asian businesses only currently account for 14% of total group revenue, so there’s a tremendous opportunity here. If both of these markets grow to the same size as that of the UK (£17.8m in sales for the six months to 30 September), I estimate the group’s annual gross profit will more than double to £46m.
Undervalued growth
At the time of writing, City analysts are expecting the group to report a pre-tax profit of £11.3m for the year ending 31 March 2018, rising to £12.4 for 2019.
I believe that these forecasts are highly conservative. As Alpha’s half-year figures show gross profit growth of 59% for the period, as the company invests in its overseas offering, I don’t see why this rate of growth cannot continue. If this rate of growth does continue, the shares look to me to be undervalued as they currently trade at a forward P/E of 18.7, cheap in my view for a firm growing revenue at a rate of 50%.
