Alpha FX Group (LSE:AFX) has just broken into the index of the 100 largest companies on the Alternative Investment Market. This is especially impressive since the company listed less than two years ago. The share price has risen over 200% since then.
It provides foreign exchange services to businesses with a focus on helping its clients avoid volatility from currency fluctuations. This is a vital part of any business that has international operations as companies stand to lose a lot of money if they make mistakes. Superdry lost £8m recently as its ‘hedging mechanisms’ did not provide it with the protection it expected, contributing to a profit warning.
I believe companies will have to start taking currency fluctuations much more seriously, a view shared by 34-year-old founder of Alpha FX, Morgan Tillbrook. The intent of the company under his leadership is to help businesses focus more on their industry and less on exchange rates. Anyone that has ever tried to make money by betting on foreign exchange can testify how unpredictable this can be. This is why I think that the services Alpha FX provides can be so valuable to the wider market. Its low-speculation approach to currency fluctuations should be the default approach for companies like Superdry.
Growing list of clients
As my Foolish colleague Edward Sheldon noted, despite its exciting growth in customer acquisition, it has only penetrated a small proportion of its addressable market. It currently lists clients such as ASOS, Halfords and Jamie Oliver. However the company sees much bigger potential opportunities opening up as its reputation grows.
Alpha FX is either very good at currency hedging or has an excellent relationship with its clients because it has a strong operating margin of over 40%. It retains 97% of its clients which really suggests it is good at the latter at the very least.
There is widespread concern about Brexit at the moment which is causing huge currency volatility. Interestingly I think this could be a big help for Alpha FX. Unstable conditions may well convince prospective clients about the risks of not using a currency hedging service. It announced on January 3 that trading has continued to be strong and is ahead of expectations. Bearing in mind that this company has already had expectations raised by over 20% this year, I think the share price could actually be lagging behind the company’s growth.
This is a small-cap company so it is important to be wary as things can still go wrong as demonstrated by Patisserie Holdings and the recent massive fraud there. Interestingly it is because of the removal of Patisserie Valerie from AIM that Alpha FX has been promoted to the AIM 100.
Some investors might be put off by the price-to-earnings ratio (P/E) which is currently sitting at 25. However I think this is justified by the growth on offer which is higher than is available in the FTSE 100. I’d strongly consider allocating a small part of my portfolio to this share.
Robert Faulkner 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.