Alpha FMC: A unique business with significant growth potential

Proactive Published 15/02/2023

Share X in f @

Quoted on the London Stock Exchange and headquartered in the United Kingdom, Alpha Financial Markets Consulting (FMC) is a company that's on a mission to be the leading, global consultancy to the asset and wealth and insurance sectors. The company's flagship offering is the provision of consultancy services. What makes the consultancy offering unique is that it's provided by the world's largest team of specialist asset and wealth management market industry experts. Alpha helps financial markets-focused companies with their business-critical projects, providing market-leading insights to help shape key business decisions, ultimately leading the companies to maximise/improve their efficiency and profits. The expected return of an investment in Alpha FMC over the next five years is 92%, according to our default estimates, which equates to an annual return of 14%. In other words, a £100,000 investment in the company is expected to return £192,000 in five years’ time. The degree of risk associated with an investment in Alpha FMC is 'medium', with the shares having an adjusted beta that is 14% above the market (1.14 vs. 1). Assuming that a suitable return level over five years is 10% per year, then an investment in the company is a 'suitable' one.

Materially large market

The company operates in a sizeable total addressable market (i.e. global financial services/market consultancy market), which we estimate is worth around $46 billion in terms of revenue. Furthermore, the market is supported by several growth drivers, including cost pressures, increasing regulations and growth in assets under management.

Strong track record

When the group listed on the public market in 2017, it set itself the goal to double the size of the business over the next four years. Since then, the goal has been achieved, and the company subsequently set a new objective to double the size of the business again within the same duration (i.e. four years). The company is on course to achieve the objective.

Clearly defined plan

The core growth strategy is centred on expanding the group's US business and growing in the insurance sector. Ongoing industry changes are driving the evolution of practices such as Digital and ESG. The company has an acquisition pipeline to help accelerate growth.

Attractive valuation

We suggest valuing the business using the absolute valuation method (rather than the relative valuation method), in particular the free cash flow valuation approach (rather than the dividend discount model). Key things that influenced the assumptions of our model include 1) the company operates in a total addressable market that is materially large; 2) Alpha's value proposition is unique 3) the management team is high-calibre and has a proven track record of organic growth; 4) the business has a strong reputation and deep relationships with global clients; and 5) the client base of Alpha is broad, diversified and expanding.

Year end Mar 31 · 2021 · 2022 · 2023 · 2024

Revenue (£mln) · 98 · 158 · 197 · 209

Gross Profit (£mln) · 35 · 59 · 71 · 76

Adj. EPS (GBp) · 15 · 21 · 24 · 24

In 2003, the idea of Alpha FMC came to Nick Kent, and he assembled the founding members of Alpha. Collectively, they wanted to build a consultancy serving their client needs to the highest standards, building the very best of team talent around a meritocratic and inclusive culture. These founding traits, of the highest quality client delivery and leading organisational culture, remain as strong today after twenty years of growth.

Listed on the Alternative Investment Market (AIM) of the London Stock Exchange since 2017 and headquartered in the United Kingdom, the mission of the company is to help financial markets-focused businesses maximise their profits, in particular, to make better decisions in relation to complex operational and organisational challenges.

Target audiences

The target audiences of the company’s current offerings are asset managers, wealth managers, third-party administrators and alternative investment managers with a newer growing team in the insurance sector.

Asset managers

The group has provided services to over 700 clients across the globe, including all the world's top 20 largest global asset managers by AUM and 80% of the top 50 as at 31 March 2022. In addition to traditional asset managers, Alpha also advises insurance-backed and pension-based businesses. The group’s clients cover the whole spectrum of institutional, intermediary and retail asset managers.

Wealth managers

Alpha works with wealth managers delivering private banking and wealth offerings, discretionary fund management and family office services to end clients. The services provided to these organisations mirror those delivered to traditional asset managers, managers, both active and passive.

Third-party administrators

The group works with the majority of the largest third party administrators, organisations that provide outsourced middle and back office services to the asset and wealth management industry. Alpha supports these organisations with a wide range of services, including sales effectiveness consulting, deal management and target operating model design and implementation.

Alternative Investment Managers

Alpha supports a range of clients in the alternative investment space, including private equity houses, alternative fund managers, and traditional asset managers with alternative investment strategies (such as real estate, private equity or other illiquid investments). The services provided to these organisations mirror those delivered to the traditional asset managers, with its Lionpoint teams specialised in the particular requirements of the alternative investment manager.

Other Providers

Finally, Alpha supports a range of other providers to the asset and wealth management industry, including software vendors and data providers. Engagements with these clients include new product development, market reviews and support responding to market requests for proposal.

Problem and solution

Alpha’s asset management industry client base is seeking to protect margins through efficiency gains, while addressing growing regulatory requirements. Alpha helps its clients to solve the problem through the provision of specialised consultancy services that are provided by the largest and most diverse team of asset managers, wealth managers and insurance markets industry experts. The team consists of 760 consultants, and they operate from 16 offices across the United Kingdom, Europe, North America and Asia (i.e. globally). We believe that the size and depth of Alpha FMC's deep knowledge experts enable the company to provide its clients with project management expertise, operating model ideas, system selection and implementation assistance which collectively ultimately result in the clients improving/maximising their efficiency or profits.

Offerings categories

Alpha's offerings fall into the following three categories:

Strategy and advisory

The group provides its clients with insight into market trends, new products, the regulatory agenda and competitive threats and opportunities. The advice that the group provides allows its clients to make decisions on managing their business and connecting with the market. The group’s consultants are industry specialists, and as part of a global team, are able to provide an international perspective for their clients, giving insight across the value chain.

Evaluation and selection

The group provides independent and impartial advice to its clients on the choice of technology solutions, outsourcing providers and other partners for their businesses. Using its current knowledge of the market and proprietary benchmarking data, the group is able to provide an up-to-date view of provider capabilities and the best solutions for the specific needs of its clients. The group’s impartial position also enables it to conduct commercial negotiations on behalf of clients and build relationships between these clients and their providers.

Implementation and execution

For the implementation and execution of complex projects, the group provides clients with professional teams who have specialist hands-on expertise in delivering complex and time-critical projects. These projects span the spectrum of front, middle and back office functions.

Offerings sub-categories

The aforementioned categories can be broken down into 14 sub-categories/practices:

Benchmarking

Benchmarking has been at the core of Alpha’s proposition since it opened in 2003. The group has spent many years building its database of cost and service data which is a key unique selling point. The data enable the creation of benchmarks to establish how much a client's operations are costing compared with the average of its peers. This information helps Alpha to establish potential operating efficiencies for its clients.

Operations & outsourcing

Alpha works with clients to strategically optimise their operating models, including advising on their outsourcing relationships.

M&A integrations

This covers both pre-deal (including due diligence, focusing on the operating model, information technology and post-deal cost base) and post-deal (from integration to defining the operating model and realising synergies).

Front office (Investments)

This covers different areas of the front office, from portfolio management to trading and risk & performance. Alpha will: 1) help define the strategy and future operating model; 2) help evaluate and select strategic partners and technology solutions, and 3) deliver end-to-end implementation programmes.

Regulatory compliance and risk

This is essentially about determining how customers get through the regulatory landscape and adopt what processes and technologies that are necessary.

Distribution

This involves applying processes and technology to improve and optimise customer services as well as sales and marketing. For instance, Alpha can create an enterprise view for its clients, of their clients and the end-to-end investor ecosystem.

Digital

This mid-sized practice focuses on how asset managers interface with their clients and involves a number of strategy-type considerations. It is essentially about the digital transformation of businesses, such as moving to a “digital by default” operating model. This involves the implementation of various technologies and projects to change the client interface/s with end investors.

Investment guidelines

This is the most specialised niche of the practices, relating to coding in guidelines that funds can or cannot be invested in and involves plenty of rules and programming. While this work is typically managed in house, following a big technology or platform change it necessitates recoding all the rules, hence creating an opportunity for Alpha. The US SEC's plans to revamp the rules around fund names, requiring funds to prove that 80 per cent of their holdings match their names, could act as a driver for this business unit.

Fintech & innovation

While this is a small practice, a major theme is the enormous number of fintechs that can help to drive efficiencies. Areas include workflow automation, data management and validation, investment research (a particularly high number of solutions), ESG data and regulatory compliance. Alpha seeks to be thought leaders in the industry and holds industry forums, with fintechs presenting to potential customers.

ETF (exchange traded funds) & indexing

This practice addresses a core theme in the industry. The issue of high fees charged by active management, along with the need to fulfil investment strategies sought out by the worlds' investors, has inspired a boom in ETFs, from the likes of Blackrock (iShares), Vanguard and State Street. Consequently, this puts commercial pressure on all asset managers to be able to offer indexing or ETFs. This area requires different technologies to normal funds. Alpha has a leading practitioner in the industry and looks at everything from the operating model to product development, technology, outsourcing and delivery.

ESG and responsible investment

This unit was established in 2020 to help clients deal with the regulation associated with the burgeoning demand for ESG assets. Alpha helps its clients build an ESG strategy and roadmap, develop an investment approach, implement reporting procedures and understand regulations and standards. This also involves identifying appropriate fintechs and sourcing of data.

Finance transformation (insurance)

The unit was created following the establishment of personal and commercial lines in 2020 in France. The members of this new practice have developed expertise relevant for the CFO’s agenda: regulation (IFRS 9, IFRS 17, Solvency 2), technology (back-office tools, accounting, consolidation), data management (data management, data warehouse) or cost efficiency through transformation projects aimed at optimising the operating model of finance departments.

Enterprise transformation

Alpha offers clients strategic thinking combined with deep specialism to arrive at answers that make strategic sense in the boardroom as well as being operationally deliverable across organisations. This includes:

Strategic target operating model design: Working with c-suites to translate their strategic plans into an enterprise design spanning people, technology, suppliers and internal processes;
Scalability and cost reduction analysis; Working with CFOs across their fund range and investment desks, breaking down stranded costs and providing a true view of where cost sits and what reductions can be delivered;
Independently reviewing and streamlining change portfolios: Ensuring clients’ finite change spend is aligned with their strategic priorities.

Retail distribution and advice

This practice works across the investment and insurance value chain helping financial advisers, platforms and life & pension providers transform and grow their businesses. Market leaders are recognising the need to drive their businesses forward and capitalise on future opportunities as they transform to meet the evolving needs of consumers. Alpha has dedicated capabilities to support organisations participating within the retail distribution and advice market and is well-placed to help drive transformation across the industry. The team comprises ex-industry practitioners who have a deep understanding of these organisations and experienced consultants who have worked across a variety of clients and transformation initiatives in this market.

Project classifications

Projects typically span multiple service lines and vary in size, duration and nature. The group principally prices its consulting services on a time and materials basis using daily charge-out rates but also uses milestone or fixed price contracts on occasions (typically in continental Europe and North America). The group undertakes projects across most of the asset and wealth management value chain and these fall into three categories:

Major programmes: These typically span more than one financial year, are multi-geography and would be valued in excess of £2 million. There could be 10 or more major programmes running in any year.
Large programmes: These are typically up to a year in duration, single or multi regions and valued between £1 million and £2 million. There are circa 10 to 20 large programmes undertaken in a year.
Small programmes: These are typically single region, focused programmes valued at less than £1 million. There are usually more than 100 small programmes undertaken in a year.

The people

Alpha is a people business and the key to the group's success is its highly talented people with deep specialist knowledge. Such deep expertise enables Alpha to help its clients deal with complex operational and organisational challenges, and clients often struggle to find these strengths in the larger more generalist consulting businesses. Alpha is keen to attract the highest quality people in its fields of operation and the company's goal is to recruit the top 5% in the field.

The group employs around 760 revenue-generating consultants (full-time equivalent basis), of which around 10% are contractors with the rest being full-time staff. Full-time consultants receive a profit share in the form of a cash bonus. For a manager, this can reach 30% of the annual salary. In the case of the senior executive team, the cash payment is smaller, while equity options are awarded on annual basis, under the management incentive plan (MIP). The company anticipates an approximate 3% equity dilution over time (strictly a maximum of 10% over three years). Unvested awards granted under the MIP are limited to a maximum of 10% in aggregate of the company’s issued share capital. Vesting of the awards is linked to several factors, depending on the individual, including earnings per share growth, total shareholder return or specific business unit EBITDA.

Operations

Competition

A key way to determine an offering’s closest competitors is by looking at other offerings that are targeting the same or similar target audience (i.e. financial markets/services-focused companies) and providing or aiming to provide the same core benefit (i.e. more/maximum business profits, in particular, financial markets/services consultancy), and then ranking the offerings in terms of the total amount of time spent using and/or money spent purchasing the offerings.

Alpha operates in a competitive global market and competes with several organisations that offer services similar to those offered by the group. Competitors include the advisory practices of major accounting firms, global consulting firms and boutique consulting businesses.

The group has been able to successfully compete against these firms by providing specialist expertise to the asset and wealth management industry, and by consistently delivering a high-quality service which attracts repeat business and fosters long-term relationships. Against the boutique consulting businesses, Alpha is able to differentiate itself through its global offering, relationships with the largest fund managers and reputation for high-quality and efficient service. Against the global consulting firms, the group differentiates itself with a specialised industry offering and tailored client solutions. Alpha is able to set itself apart from the advisory practices of major accounting firms through its specialist sector focus and by deploying highly experienced industry consultants to client engagements, who have demonstrable track records of delivering complex projects. That is made possible through the group’s ability to attract and retain high-calibre consultants.

With that said, we view that the closest competitor of the Alpha FMC offering(s) is those provided by Accenture (NYSE:ACN), the largest consulting firm in the world by number of employees.

Significant market size

Here, the total addressable market (TAM) is defined as the global financial services/market consultancy market and based on a number of assumptions, it is estimated that the size of the market as of today (1st February 2023), in terms of revenue, is $46 billion.

The serviceable available market (SAM) is defined as the global asset management, wealth management and insurance consultancy market, and based on a number of assumptions, it is estimated that the size of the market as of today, in terms of revenue, is $23 billion.

The key structural drivers in the financial services/markets industry are as follows:

Cost pressures

As the pressures on the asset management sector continue to increase, Alpha offers asset managers help and expertise to improve efficiency, reduce costs and upgrade legacy systems. That's probably the most important structural driver for Alpha since ongoing cost pressures force businesses to seek major operational improvements, including upgrading their systems, which plays directly into Alpha's strengths.

Regulatory demand

Regulations are continually changing and evolving and new ones are introduced and this is extremely challenging for businesses to cope with on their own.

Growth in assets under management

Global assets under management run by money and wealth managers grew by 12% to US$112 trillion over 2021, according to BCG. That growth rate was well above the 7% average for the previous twenty-year period and was supported by higher than normal net flow rates at US$4.4trn or 4.4%.

Client and societal expectations

This factor has been made apparent through the ascent of ESG (environmental, social and corporate governance) in recent years, which resulted in the establishment of a new business practice for Alpha.

Business strategy

Alpha's strategic objective is to be recognised as the world's leading consultancy focused on asset and wealth management and insurance industries.

The group listed in 2017, with the goal at that time to double the size of the business over four years. That objective was achieved in 2020, and the new goal was set to double the business again over the following four years. The plan is to identify attractive markets to expand, and at present that is focused on the US asset and wealth management along with insurance, which is initially UK and Europe-focused. The geographic push is now tilted to the US, while there are also attractive growth prospects in the Asia-Pacific region. The strategy includes acquisitions, with the largest to date, Lionpoint, completed in May 2021. We understand that management continues to be actively involved in a number of acquisition conversations. The focus is on bolt-on acquisitions, though a larger acquisition cannot be ruled out. Nevertheless, the plan is to maintain a strong balance sheet, which would likely remain in a net cash position.

Geographic expansion

There is a particular opportunity for dynamic expansion in North America. Meanwhile, Alpha also intends to grow and consolidate Europe and the UK, with strategic expansion across Asia.

Sector and service line expansion

Alpha has expanded its offerings to fourteen business practices along with the currently ring-fenced Lionpoint alternatives business and its proprietary software and technology consulting divisions. The ESG practice was added during 2021 and management has been rolling out its plan for rapid expansion in the new insurance vertical. In addition, the management plans further expansion and geographic roll-out of its business practices globally.

Expand the group's product and technology offerings

This involves beefing up Aiviq (previously Alpha Data Solutions), which covers the group's proprietary software offerings, and currently mainly reflects the 360 Sales Vista products (acquired via Track Two) and the Obsidian acquisition. It also involves expanding Alpha Technology Solutions, which deals with the integration of third-party solutions. In this area, the group at present has particular strength in the SimCorp platform, following the acquisition of Axxys and there is scope to expand this skill-set.

Strategic acquisitions

Management wants to build on the successful integrations of Lionpoint, Axxsys and Obsidian. It has a healthy acquisition pipeline to complement organic growth. The focus is on acquiring assets with a quality proposition, high quality of service and quality product that culturally fits well into the Alpha group.

Team

The management team has a wealth of experience in the financial services/markets industry.

Executive

Global chief executive officer: Euan Fraser

Euan has served as CEO of Alpha since 2013. During this period, the business has increased EBITDA almost seven-fold, and he has led the Group through two private equity transitions and a public listing on the London Stock Exchange’s AIM in 2017. Euan was previously Chief Executive Officer of Alpha UK, starting in April 2011, where he established both Alpha’s M&A Integration and Operations & Outsourcing practices. He joined Alpha in 2004 and has over 20 years’ financial services experience, having worked at Merrill Lynch and KPMG, where he qualified as a chartered accountant.

Euan keeps the skills to support and deliver the Group’s strategy up to date through his role as Chief Executive Officer of a global consulting firm operating within the financial services sector. In this role, Euan has to understand and manage the interests of a range of stakeholders, including employees, clients, competitors and investors. Euan maintains a number of strong industry relationships that involve sharing of knowledge and perspectives.

On April 1, Euan will be succeeded as CEO and as a board member by Luc Baqué, who is currently the Global Head of Asset & Wealth Management Consulting at Alpha. Luc, aged 46, joined Alpha in 2010 to create the Paris Office. He became Head of Europe in 2016 and Global Head of Asset & Wealth Management Consulting in 2020. Luc has more than 20 years of industry experience. Prior to joining Alpha, he spent five years with UBS in Paris as head of change management and six years with Solving International, a strategy management consultancy, specialising in Financial Services. Euan has agreed to remain with the Group as a Strategic Adviser.

Global chief financial officer: John Paton

John is a chartered accountant with 23 years of corporate finance, banking and audit experience. He joined from HSBC where he was a Director in the UK Mid-Market Advisory team (2007-12), the Corporate Origination team (2012-16) and latterly, the UK Banking team (2016-2018). Over his 11-year tenure he advised on a variety of M&A transactions and led loan financings for UK corporates. Prior to this, he spent more than five years at MacArthur & Co. focusing on capital raisings including AIM IPOs. John started his career at KPMG, where he spent nearly seven years working across financial services audit and risk management with exposure to financial reporting requirements, governance, risk & internal controls and systems’ implementation. He is a member of the Institute of Chartered Accountants of Scotland, graduated LLB (Hons) from the University of Aberdeen and holds an Executive MBA from the University of Bristol & École Nationale des Ponts & Chaussées, France. John joined Alpha in February 2018.

Global chief commercial officer: Nick Fienberg

Nick has 15 years of experience consulting in financial services, in particular the capital markets sector. Specialising in asset management outsourcing, he has worked with a wide range of clients on advisory and implementation roles covering large-scale outsourcing and organisational change initiatives, strategic business studies and market trend analysis.

Alongside Nick’s CCO role, he also has overall responsibility for the Lionpoint and Axxsys businesses.

Global chief operating officer: Sarah Peacock

Sarah is Alpha’s Global Chief Operating Officer. She joined Alpha in 2008. Before moving into business operations, she spent over 10 years in asset and wealth management consulting with experience performing both project management and functional roles and working extensively on implementation and business transformation projects. As COO, Sarah is responsible for overseeing operations functions globally including IT & infrastructure, data privacy, people and talent management, service delivery and knowledge management.

Global head of Aiviq: Lee Griggs

Lee has a record of international business building with over 20 years experience, providing market-leading enterprise and SaaS solutions to leading financial institutions. Lee has extensive knowledge of strategy creation, execution and expansion and has a proven track record in business development, process management and organisational optimisation.

Global head of insurance consulting: Stuart McNulty

Recently, Stuart has been tasked to spearhead the growth of Alpha’s insurance offering globally. Prior to this Stuart was the Global Chief Client Officer & Head of UK for Asset & Wealth Management Consulting at Alpha. Stuart began his career at Accenture (NYSE:ACN), where he specialised in the capital markets sector, leading projects ranging from system implementations to process change initiatives. Stuart then moved to J.P. Morgan, where he ran strategic projects within the credit exotics and hybrids middle office team, before joining Alpha in 2007. Since then, Stuart has worked on a wide variety of asset management projects, including new product development, competitive analysis, rate card reviews and large-scale onboarding programmes.

Stuart holds a First Class honours degree in Computer Science from the University of Sheffield.

Global chief client officer (asset & wealth management consulting): Joe Morant

Joe is Global Chief Client Officer for Alpha’s AWM business. Previously, Joe was Head of North America for Asset & Wealth Management Consulting at Alpha. Prior to joining Alpha Joe held operations and technology leadership roles at Nuveen Investments and BNY Mellon (NYSE:BK) Asset Management. Joe has also held executive management positions at several service provider and consulting firms. Joe has worked extensively across the US and Europe, consulting to a range of leading asset managers. He has a breadth of experience across all aspects of the asset management business ranging from major change programmes to corporate strategy and operating model definition.

From April 1, Joe will become the head of asset & wealth management consulting for the group.

Board

Independent non-executive chairman: Ken Fry (chair) A, R

Ken joined the Alpha Board in 2016, following almost 10 years as the Global Chief Operating Officer at Aberdeen Asset Management. He was appointed the Board’s Non-Executive Chairman in February 2018. Ken has over 27 years’ experience in financial services and has considerable experience integrating acquisitions within the investment management industry. Ken has a strong technology and operations background and has undertaken a number of transformational projects during his career. He directed the integration of many major acquisitions while at Aberdeen Asset Management, including assets acquired from Deutsche Asset Management, Credit Suisse Asset Management and Scottish Widows Investment Partners.

Ken keeps the skills to support and deliver the group’s strategy up to date by maintaining a wide network of contacts within investment management globally. He regularly attends conferences and discussion forums to keep abreast of industry issues and meets with both clients and investors. He also advises on M&A strategy within the investment management industry.

Global chief executive officer: Euan Fraser

For the profile, see the 'executive' team section of this report, above.

Global chief financial officer: John Paton

For the profile, see the 'executive' team section of this report, above.

Non-executive director: Penny Judd R (chair)

Penny joined the Alpha Board as a Non-Executive Director in February 2018, having previously held the roles of Managing Director and EMEA Head of Compliance at both Nomura International plc and UBS AG. Penny has a strong public markets and financial services background, with over 30 years’ experience in compliance, regulation, corporate finance and audit. She is also a chartered accountant and is currently Non-Executive Director and Chair of Audit Committee for both Trufin plc and Team17 Group PLC (AIM:TM17).

Penny keeps the skills to support and deliver the Group’s strategy up to date through her experience gained on other listed company boards, while also maintaining a wide network of contacts in financial services and regulation. She attends various conferences and events covering relevant industry and governance matters, and meets with a range of advisers and institutional investors in AIM and main market companies.

Independent non-executive director: Jill May

Jill joined the Alpha Board as a Non-Executive Director in July 2020. She has over 20 years’ experience in investment banking, with her executive career spent working in corporate finance for SG Warburg & Co. Ltd from 1985 to 1995, and senior positions in Group Strategy at UBS where she was a Managing Director from 2001 to 2012.

She was a Panel Member from 2013 to 2018 and a Non-Executive Director from 2013 to 2016 of the Competition and Markets Authority (CMA), and a Non-Executive Director of the Institute of Chartered Accountants in England and Wales (ICAEW) from 2015 to 2019.

Jill is currently an External Member of the Prudential Regulation Committee at the Bank of England. Her current listed company experience includes her roles as Non-Executive Director of Standard Life Investments Property Income Trust Limited, JP Morgan Claverhouse Investment Trust plc and Ruffer Investment Company Limited.

Non-executive director: Maeve Byrne A (chair)

Maeve is a Fellow of the Institute of Chartered Accountants in Ireland and has over 30 years’ experience in Financial Services.

She started her career as an auditor with KPMG Ireland and worked in several other KPMG international offices in Europe and North America. Within KPMG, Maeve moved from Audit to Transaction Services where she was a Financial Services Partner from 2002 to 2014. From 2010 to 2013, Maeve was seconded to Royal Bank of Scotland and the Non-Core Division where she was CFO and a member of the Group Finance Board & Risk and Control Committee. From 2014 to 2017, she held senior executive roles at the Royal Bank of Scotland in Capital Resolutions Group and Williams & Glyn.

Since 2017, Maeve has focused on transformation services, offering Board advisory services as an independent consultant. She has worked with Financial Services companies including Santander and clients in the Fintech/Neo bank space.

Financials

Most recent full-year results

In the 12-months period ended 31st March 2022, revenue increased by 61.1% to £158.0 million (FY21: £98.1 million), driven almost entirely by net fee income (99.9%), across all three of the company's main geographical markets (i.e. North America, United Kingdom and Europe & APAC). The North America region saw the largest growth of all the regions (184% vs. 38.6% for Europe & APAC and 34.9% for the United Kingdom), while the United Kingdom region represents the largest share of the total (46% vs. 30% for North America and 25% for Europe & APAC). Gross profit increased by 70.4% to 59.4 million (FY21: 34.8 million), equating to a two percentage point improvement in the profit margin, to 37.59% (FY21: 35.47%). The improved margin is mainly due to higher consultancy utilisation levels and improved consulting rates. Mainly reflecting increased acquisition costs, higher acquired intangible asset amortisation and share-based payments costs, profit before tax increased by 65.9% to £14.9 million (FY21: £9.0 million), equating to a 26 basis point improvement in the profit margin, to 9.43% (FY21: 9.17%). Basic earnings per share increased by 33.7% to 7.69p (FY21: 5.75p).

On a like-for-like basis (i.e. excluding the acquisition of Lionpoint), revenue increased by 31.3% to £128.6 million. Adjusted EBITDA increased by 56.0% to £33.9 million (FY21: £21.7 million), adjusted profit before tax increased by 62.2% to £31.8 million (FY21: £19.6 million), and adjusted earnings per share increased by 43.9% to 21.46p (FY21: 14.91p).

In relation to the financial position of the company, net current assets increased by 21.5% to £27.2 million (FY21: £22.4 million), and cash increased by 86.7% to £63.5 million (FY21: £34.0 million). Net assets increased by 40.7% to £132.7 million (FY21: £94.4 million). With no debt, net cash increased by 86.7% to £63.5 million (FY21: £34.0 million).

After adjusting for higher share-based payments (£4.08m for FY22 vs. £1.69m for FY21), taxation (£6.37 for FY22 and £3.14m for FY21) and other items, net cash generated from operating activities increased by 59.3% to £33.5 million (FY21: £21.0 million). Mainly due to the Lionpoint acquisition (in May 2021), net cash used from investing activities increased by 8x to £24.5 million (FY21: £2.9 million). Net cash from financing activities swung to using £20.0 million (FY21: £8.5 million), mainly due to the issuance of new shares (to fund the Lionpoint acquisition). Final dividend increased by 55% to 7.50p per share (FY21: 4.85p), resulting in a 49.6% jump in the total dividend for the year, to 10.40p (FY21: 6.95p).

On a like-for-like basis (i.e. excluding the acquisition of Lionpoint), adjusted cash generated from operating activities increased by 61% to £36.0 million (FY21: £22.3 million), equating to an adjusted cash conversion of 112% (FY 21: 111%).

Most recent interims

In the six-month period ended 30th September 2022, revenue increased by 57.3% to £107.6 million (H1 FY22: £68.4 million), driven almost entirely by higher net fee income (net fee income accounts for 99.4% of revenue), from all the company's main geographical markets (i.e. North America, United Kingdom and Europe & APAC). The North America region experienced the highest level of growth of all the company's key regions (at 135%) and now accounts for the largest amount of the group's total net fee income (41.4% of the group's total net fee income). Total net fee income jumped by 56.5% to £107.0 million (H1 FY22: £68.4 million).

The number of client relationships increased by 19% to 787 clients (H1 22: 662), boosted by both new client wins and client retention. Gross profit increased by 45.3% to £38.4 million (H1 FY22: £26.5 million), equating to a three percentage point decrease in the gross profit margin, to 35.7% (H1 FY22: 38.7%). The decrease in the margin is mainly due to a planned easing of consultant utilisation from FY22’s elevated levels and staff salary increases being slightly lagged by achieving higher consultant day rates. The number of consultants increased by 40.4% to 921 consultants (H1 FY22: 656 consultants), driven by client demand. The director headcount increased by 11% to 97 directors (H1 FY22: 88 directors). Profit before tax increased by 235.6% to £14.2 million (H1 22: £4.2 million), equating to a seven percentage point improvement in the profit margin, to 13.20% (H1 FY22: 6.14%). Basic earnings per share increased by 10x to 9.10p (H1 22: 0.87p).

On a like-for-like basis (i.e. excluding the acquisition of Lionpoint), net fee income increased by 45.3% (H1 FY22: 21.7%). Adjusted EBITDA increased by 45.6% to £22.5 million (H1 FY22: £15.4 million), equating to a 1 percentage point decrease in the margin, to 21.5% (H1 FY22: 22.6%). Adjusted profit before tax increased by 47.2% to £21.3 million (H1 22: £14.4 million). Adjusted earnings per share increased by 43.0% to 14.09p (H1 22: 9.85p).

Net current assets decreased by 32.0% to £18.5 million (H2 22: £27.2 million), and cash decreased by 24.7% to £47.8 million (H2 22: £63.5 million) as funds were used towards the (Lionpoint) acquisition. Net assets increased by 11.4% to £147.9 million (H2 22: £132.7 million), and debt increased to £7.5 million (H2 22: nil). The company has access to a £20.0m revolving credit facility, enabling the company to further improve its liquidity if required. Overall, net cash decreased by 36.5% to £40.3 million (H2 22: £63.5 million).

Net cash generated from operating activities decreased by 63.3% to £2.2 million (H1 FY22: £6.0 million) as the improved profits were outweighed by higher working capital requirements and tax payments. Adjusted cash generated from operating activities decreased by 50.6% to £4.2 million (H1 FY22: £8.5 million). Net cash used from investing activities decreased by 10.4% to £21.5 million (H1 FY22: £24.0 million). A significant portion of the cash (96%) was used to pay for the (Lionpoint) acquisition. Net cash from financing activities switched to using £3.3 million (H1 FY22: £23.8 million), mainly because no new shares were issued during the period. Interim dividend increased by 27.6% to 3.70p per share (H1 FY22: 2.90p).

Forecasts

Our financial forecasts can be found in the tables below.

Profit and loss

Balance sheet

Cash flow statement

Risks

As with any investment, investing in Alpha FMC carries a level of risk. Overall, based on the Alpha FMC's adjusted beta (i.e. 1.139), the degree of risk associated with an investment in Alpha FMC is 'medium'.

Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more/most accurately predicts a future beta. In addition, here, we have assumed that for an investment to be considered 'medium' risk, it must have a beta value of between 0.5 and 1.5. Further information about the beta ratings can be found in the appendix section of this report.

The key risks can be found below.

Economic downturn

The group's client base in the asset and wealth management and insurance industry has a relatively high market sensitivity. We note that the impact on stock market performance on assets under management are reflected in valuations and can also have an impact on investment flows. A sustained reduction in aggregate assets under management or overall returns and profitability in the asset and wealth management industry could result in a material reduction in the volume and value of consultancy services that clients choose to purchase from the group.

End-market changes

The asset and wealth management industry has experienced a high level of corporate mergers and acquisitions in recent years. This process has been driven by a long-run decline in management fees, which has forced consolidation, and further consolidation is widely anticipated. While this consolidation creates a significant amount of work for the group, over the very long term a continued consolidation of the industry could result in a reduction of the number of clients that the group can target even if there is still considerable change within these organisations.

Competitive environment

There are very low start-up costs for any new entrant into the market and the group cannot prevent any person or organisation from replicating their business model. Larger competitors may, in the future adopt more aggressive expansion strategies.

Project risk

The group’s revenues derive principally from selling the services of its people on a time and materials basis.

People and resourcing

Revenue growth is reliant on attracting new personnel to expand existing services and lead new service offerings. The group’s ability to generate fees from existing and new customers is reliant on its ability to continue to offer the expertise of experienced consultants. The loss of the services of one or more senior people may result in a material adverse impact on the group’s performance and future success. There is a risk that utilisation rates, which drive group profitability, may be adversely impacted by poorly timed headcount growth or an unexpected decline in client projects.

Technological change

One of the key aspects of the group’s success is offering a range of products and services that use the latest and most effective technology. There is a risk that should the group not be able to evolve along with the technology in the industry, this could result in a material adverse impact on the efficacy of the group’s offering to clients.

Geographical complexity

The continued growth of the group and expansion into new countries bring associated risks. The group currently generates the bulk of its client business from the UK, US and France, with the remaining proportion of work mostly in the Benelux countries, Switzerland and Singapore. The group’s head office and most of its senior management are based in the UK and there is a risk that the group’s continued growth overseas may result in a reduction in the quality of control and oversight provided by senior management.

Acquisitions

There are implementation risks in the acquisition strategy.

Attractive valuation

We estimate that the expected return on an investment in the company over the next five years is 92%, which equates to an annual return of 14%. In other words, a £100,000 investment in the company is expected to return £192,000 in five years' time. The assumptions used to estimate the return figure can be found in the table below.

Assuming that a suitable return level over five years is 10% per year and Alpha FMC achieves its expected return level (of 92%), then an investment in the company is considered to be a 'suitable' one.

Key assumptions

Sensitivity analysis

The three main inputs that result in the greatest change in the expected return of the Alpha investment are, in order of importance (from highest to lowest):

The size of the total addressable market (the default size is $46 billion);
Alpha FMC peak market share (the default share is 1%); and
The discount rate (the default time-weighted average rate is 10%).

The impact of a 10% change in those main inputs to the expected return of the Alpha investment is shown in the table below.

Sensitivity analysis

Source: Proactive Investors.

Appendix

Cost of equity

The cost of equity of Alpha FMC is 12.68%, according to our calculation and assumptions (the calculation and assumptions can be found in the table below).

Key assumptions

Alternative DCF model

As noted earlier in this report, research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more/most accurate is the absolute valuation approach, in particular the free cash flow method, so that's the method that we suggest using to determine the estimated value of the company (the valuation based on the free cash flow approach can be found in the valuation section of this report); nevertheless, for completeness purposes, separately, the valuation of the company is also estimated using the divided discount valuation approach.

Accordingly, we estimate that the expected return of an investment in Alpha FMC over the next five years is 66%, which equates to an annual return of 11%. In other words, a £100,000 investment in the company is expected to return £166,000 in five years' time. The assumptions used to estimate the return figure can be found in the table below.

Key assumptions

Sensitivity analysis

The three main inputs that result in the greatest change in the expected return of the Alpha investment are, in order of importance (from highest to lowest):

The discount rate (the default time-weighted average rate is 13%).
The initial growth rate (the default rate is 55%); and
The terminal growth rate (the default rate is 3%).

The impact of a 10% change in those main inputs to the expected return of the Alpha investment is shown in the table below.

Sensitivity analysis

Source: Proactive Investors.

Relative valuation approach

As noted earlier in this report, research suggests that in terms of estimating the expected return of an investment over a period of 12 months or more, the approach that is more/most accurate is the discounted cash flow approach, so that's the approach that we suggest using to determine the estimated value of the company (the valuation based on the discounted cash flow approach can be found in the valuation section of this report); nevertheless, for completeness purposes, separately, the valuation of the company is also estimated using the relative valuation approach.

For the numerator, we believe that to account for the different financial leverage levels of its peers, it's best to use enterprise value (EV), rather than price. For the denominator, we believe that because we expect Alpha FMC to reinvest a good portion of its revenue back into the business over the forecast period and, therefore, its earnings are expected to be abnormally low over the period, it's best to use sales. Accordingly, we suggest valuing the company using the EV/sales ratio. However, we feel that to take into account the different business lifecycle (and, therefore, growth) stages of its peers, the most suitable valuation multiple to use is the (revenue) growth-adjusted EV/sales multiple, rather than the EV/sales multiple.

Consequently, based on the growth-adjusted EV/sales multiple, we estimate that the expected return on an investment in Alpha FMC over the next 12 months is 40%. In other words, an £100,000 investment in the company is expected to return £140,000 in 12 months time. The assumptions used to estimate the return figure can be found in the table below.

Key assumptions

Sensitivity analysis

The three main inputs that result in the greatest change in the expected return of the Alpha investment are, in order of importance (from highest to lowest):

The growth-adjusted EV/sales multiple (the default multiple is 0.21x);
The Year-one revenue forecast (the default forecast is £207 million); and
The Year 2 to 4 revenue growth forecast (the default forecast is 15%)

The impact of a 10% change in those main inputs to the expected return of the Alpha FMC investment is shown in the table below.

Sensitivity analysis

Source: Proactive Investors.

Peers

Dividend

Since the company's listing (i.e. around five years ago), the median dividend growth rate is 16%, and the mean is 48%. The constant/fixed rate dividend rate is 11.97%; in other words, if the company had grown its dividend during that period at a rate that is constant (rather than variable), then the rate would be 11.97%.

Significant shareholders

Risk rating

Financial forecasts long term assumptions

References and notes

Note, the main adjusting items are: 1) share-based payments charge, 2) amortisation of acquired intangible assets, 3) earn-out and deferred consideration, 4) foreign exchange gains and losses, 5) acquisition costs and 6) loss on the disposal of fixed assets.
Global financial markets consultancy market = World GDP x consultancy services as a proportion of World GDP x financial services as a proportion of World GDP = $100 trillion x 0.61% x 7.5%. = $46 billion.
=50% of the global financial markets consultancy market.
= UK GDP x consultancy as a proportion of GDP x financial services as a proportion of GDP = $3.131 trillion x 0.84% x 8.3%.
Stadler, Enduring Success, 3–5.
https://www.macrotrends.net/countries/WLD/world/gdp-growth-rate
http://escml.umd.edu/Papers/ObsCPMT.pdf
Levie J, Lichtenstein BB (2010) A terminal assessment of stages theory: Introducing a dynamic approach to entrepreneurship. Entrepreneurship: Theory & Practice 34(2): 317–350. https://doi.org/10.1111/j.1540-6520.2010.00377.x
Stef Hinfelaar et al.:, 2019.
Dickinson, 2010.
http://escml.umd.edu/Papers/ObsCPMT.pdf
http://people.stern.nyu.edu/adamodar/pdfiles/papers/younggrowth.pdf
Research shows that an investment has two main types of risks: 1) non-systematic and 2) systematic. Systematic risk is the risk related to the overall market, and non-systematic risk is the risk that's specific to an individual investment. Evidence shows that taking on non-systematic risk is inefficient, and it's, therefore, best to eliminate it; and in most cases, elimination is fairy easy to do [by holding a diversified portfolio of investments (i.e. around 15 investments)]. Accordingly, when assessing the riskiness of an investment, it’s best to look at the systematic risk only (i.e. ignore the non-systematic risk). A key measure of systematic risk is beta, and a main way to determine the riskiness of an investment is to compare the beta of the investment with the beta of the market, which is 1.
Demirakos et al., 2010; Gleason et al., 2013
https://www.newyorkfed.org/mediabrary/media/medialibrary/media/research/staff_reports/research_papers/9809.pdf
The group has re-presented the consolidated statement of cash flows in the comparative year to reconcile from "profit for the year" rather than "operating profit" to align with the requirements of IAS 7.
Source: Datamonitor (2008).
World Bank Figures. 2005 Available at: http://data.worldbank.org/indicator/NY.GDP.PCAP.CD?page = 1