Alpha FMC: Record Growth and a Bright Medium-Term Outlook
Alpha Financial Markets Consulting PLC (AIM:AFM) (Alpha FMC) recently published its full-year audited results for the fiscal year ended 31 March 2023 (FY23). Alpha FMC is a leading global provider of specialist consultancy services to the asset management, wealth management, and insurance industries. The year was marked by remarkable financial growth, strategic developments, and operational advancements, with the company experiencing double-digit organic growth across all regions. Consequently, we 1) have updated our forecasts; 2) now estimate that the expected return of an investment in Alpha FMC over the next five years is 55%, which equates to an annual return of 9.2%; and 3) continue to view an investment in the company as a 'suitable' one.
Summary
Strong full-year results
Alpha FMC demonstrated strong performance in FY23, with significant financial growth, continued expansion, and solid operational achievements. The company's commitment to its strategic growth objectives and ongoing investments in talent and client relationships has positioned it well for future growth. The outlook for FY24 remains positive, with expectations for continued growth in-line with the company's 2028 strategic ambition. Alpha FMC's leadership is confident in the company's ability to navigate the challenges of the global consulting market and achieve continued success. Investors and potential investors should take note of Alpha FMC's robust financial performance, strategic acquisitions, and operational advancements. These factors, combined with a clear growth strategy and strong leadership, position the company for continued success in the coming years. Alpha FMC remains an attractive investment proposition in the consulting services industry.
Updated forecasts
Upon a careful review of Alpha FMC's recent results, we have revised our FY24 forecasts. We've increased our revenue prediction by 2.6% to £240 million, while forecasting a gross margin estimate of 35%, yielding a gross profit forecast of £84 million. Additionally, our adjusted EPS forecast is 27.5p, indicating our confidence in the company's potential for sustained profitability and shareholder value enhancement. We note that our projected two-year growth is beneath the rate needed to achieve management's aim of doubling the business by 2028, indicating a possible upside opportunity.
Medium risk
The risk associated with an investment in Alpha FMC has been adjusted slightly lower, with shares having an adjusted beta that is 10% above the market (previously 11%).
Attractive valuation
The main things that underlie the assumptions of our model remain the same, which are: 1) the company operates in a total addressable market that is materially large; 2) Alpha's value proposition is unique; and 3) the management team is high-calibre and has a proven track record of organic growth.
Year end Mar 31 · 2021 · 2022 · 2023 · 2024
Revenue (£mln) · 98 · 158 · 229 · 240
Gross Profit (£mln) · 35 · 59 · 80 · 84
Adj. EPS (GBp) · 15.0 · 21.0 · 29.3 · 27.5
Alpha FMC reported an impressive financial performance for FY23. The company’s revenue increased by 44.8% to £228.7m, compared to £158.0m in FY22, and net fee income rose by 43.9% to £227.2m, or 36.1% on a constant currency basis. This increase in net fee income reflects an organic growth rate of 39.6%.
The gross profit for FY23 increased by 35.4% to £80.4m, reflecting an easing of utilisation to target levels and continued investment in the company's growing team. The adjusted EBITDA also saw an increase of 37.5% to £46.6m, with a 20.5% margin which is largely consistent with FY22's 21.5%.
The company also reported an adjusted profit before tax of £44.0m, marking an increase of 38.6% from £31.8m in FY22. Alpha FMC reported adjusted earnings per share of 29.27p, reflecting an increase of 36.4% from 21.46p in FY22. On a statutory basis, profit before tax increased to £25.8m, up from £14.9m in FY22, and basic earnings per share increased to 15.82p, compared to 7.69p in FY22.
Alpha FMC maintained good adjusted cash conversion of 74.0%, with adjusted cash generated from operating activities amounting to £32.9m. The company ended FY23 with a robust balance sheet and a net cash balance of £59.2m.
In view of Alpha's strong financial performance and healthy cash position, the board has recommended a final dividend of 10.50p, an increase from 7.50p in FY22.
Operational highlights
Alpha FMC reported double-digit organic net fee income growth across all regions, indicating the firm’s strong position in key strategic regions such as North America. The company continued to strengthen client relationships, with the number of clients that the group has worked with increasing to 874, from 718 in FY22. This increase in the client base spanned Alpha FMC's global businesses, reflecting the company’s broad reach and strong client relationships.
The company also reported growth in its insurance offering, which was supported by the appointment of a global head of insurance consulting to further the expansion of the proposition. The consultant headcount increased to 994, up from 760 in FY22, including the addition of 13 new directors. This investment in talent underscores the company's commitment to strengthening its team and enhancing its service offerings.
Alpha FMC implemented a CEO succession plan and relevant governance changes during FY23. These changes included the appointment of a new Global Head of Asset & Wealth Management Consulting. Post-year end, the company also completed the acquisition of Shoreline, an APAC-based asset and wealth management consultancy, in May 2023. The integration process is reported to be progressing well.
Outlook
Despite a backdrop of ongoing macroeconomic uncertainty, Alpha FMC performed extremely well during FY23. The company's long-term structural growth drivers remain strong, supporting the continued demand for its services. As the global consulting market experiences increased competition and overcapacity in the short term, Alpha FMC expects to manage discretionary spend and invest selectively for the future. The company's 2028 strategic ambition is to double its size, an objective that aligns well with its strong client proposition and business strategy.
While the company acknowledges higher levels of competition and a lengthening sales cycle, it is confident that its business strategy will continue to drive market share growth. Alpha FMC enters FY24 with resilient trading and a good pipeline of new business opportunities. The board remains confident of delivering full-year results in line with current market expectations.
Leadership commentary
Commenting on the results, Luc Baqué, who assumed the role of CEO after Euan Fraser's tenure ended on 31 March 2023, expressed his pleasure at the strong financial performance of the business over the year. Baqué highlighted the company's exceptional organic growth across all regions, particularly North America. Despite the challenges of a lengthening sales cycle and increased competition, he reaffirmed the company's readiness to take on FY24 with resilient trading and a good pipeline of new business opportunities. Baqué expressed confidence in the company's compelling proposition to clients, leading talent base, and clear growth strategy as they progress towards their 2028 strategic goals.
Euan Fraser, CEO until 31 March 2023, also commented on the results, expressing his delight that the group exceeded their expectations with strong growth and financial results. The group achieved the ambition set out in 2020 to double in size, a goal they reached well ahead of the plan. Fraser expressed pride in the Alpha team for reaching this landmark, and he is certain many more successes will follow. Fraser praised the leadership of Luc Baqué and voiced his anticipation for the future of the group under his guidance.
Financials
Following a comprehensive review of the recently announced audited results for Alpha FMC, we have decided to upgrade our financial forecasts for FY24. Specifically, we have revised our revenue expectations upwards by 2.6%, with a new target of £240 million, a positive adjustment from our previous forecast of £234 million.
We anticipate a gross margin at around 35%. Consequently, this would translate to a projected gross profit of £84 million, signifying the company's potential to maintain its profitability in the next financial year.
Furthermore, we have also adjusted our forecast for Alpha FMC's adjusted earnings per share (EPS). Our analysis leads us to predict a figure of 27.5p.
We believe that these revised forecasts reflect a positive outlook for Alpha FMC, affirming our confidence in the company's strong financial performance and its ability to navigate the dynamic market landscape successfully.
Risks
We have taken this opportunity to review the risk level associated with an investment in Alpha FMC. The risk level has been adjusted slightly lower, with shares having an adjusted beta that is 10% above the market (previously 11%).
Valuation
We now estimate that the expected return on an investment in the company over the next five years is 55%, which equates to an annual return of 9.2%. In other words, a £100,000 investment in the company is expected to return £155,000 in five years' time.
In determining the valuation of the company, we continue to 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.