Firing on all cylinders
Alpha Financial Markets Consulting PLC (AIM:AFM) (Alpha) announced a strong first half performance, with net fee income (NFI) increasing by 43.9% to £68.4mln and adjusted underlying earnings (EBITDA) lifting by 52.5% to £15.4mln. Adjusted earnings per share jumped by 40.9% to 9.85p and the interim dividend was boosted by 38.1% to 2.90p.
The growth was driven by strong demand drivers in the group's target markets along with the acquisition of Lionpoint, a US-based consultancy that specialises in the alternative investments space, which completed in May.
On an organic basis, NFI grew by 22.7%, or by about 25% on an organic constant currency basis, while Lionpoint contributed £10.5mln in its initial four months of ownership.
Consultant headcount jumped by 46% over the six months to 656. This includes more than 120 people from the acquired Lionpoint as well as many poached from rivals, including the big four consulting firms. Meanwhile, staff attrition rose slightly to 7.5% but this is well below industry averages. The group established 57 new client relationships in the period, doubling that of the corresponding six months.
Management says that the strong structural growth drivers remain in place — these being growth in assets under management, regulatory demand and cost pressures (which inspire change to maintain margins). In addition, the ESG (environmental, social, and governance) theme is providing further impetus. The group has strong sales momentum and a growing pipeline of potential new business going into the second half of the financial year. Given the momentum in the first half and the growth in the opportunity pipeline, the board now expects to deliver full-year results ahead of market expectations.
Strong first half results
In light of the strong performance, the group is firmly on target to reach its goal of doubling revenues by 2024. This goal is underpinned by the move into insurance, along with the expansion in America and the drive into new service lines including the new ESG & Responsible Investment practice. We note that the new insurance practice already has 33 consultants and has ambitious growth plans.
Initiating forecasts
We forecast net fee income to rise by 41.4% to £138.5mln in the current year, and by 14.6% in FY23 (fiscal 2023) to £158.7mln. We forecast adjusted EBITDA to rise by 38.1% to £30.0mln in the current year, and by 12.4% in FY23 to £33.7mln. The group retains a strong balance sheet, with net cash of £40.0mln. In addition, the group has leases and acquisition liabilities totalling £41.6mln, putting it in an overall net debt position of £1.6mln. On our forecasts, the group will be comfortably in an overall net cash position by the end of the current financial year, helped by the typically stronger second-half cash generation.
Source: Company accounts and Proactive Research
Net fee income (NFI) increased by 43.9% to £68.4mln, including 22.7% organic growth, along with £10.5mln from Lionpoint in its initial four months of ownership. There was a currency headwind primarily relating to the US dollar, which weakened by c 3% against sterling on average exchange rates and reduced NFI by c £2.2mln or 3.6%.
The UK region NFI grew by 22.6% to £32.4mln, including 14.0% organic growth along with a contribution from Lionpoint. There was strong progress from UK Insurance, Investments and Operations practices. The high gross margin reflected positive rates progression and good utilisation. The group saw strong new client wins in the period and management reports a healthy pipeline going into the second half.
North America NFI grew by 143.2% to £18.8mln, including 46.6% organic growth and £7.5mln from Lionpoint. The gross margin improvement reflected strong utilisation and good fee rate progression. Management reports strong second half visibility and a healthy pipeline.
The Europe and Asia region grew NFI by 28.6% to £17.1mln, including 22.6% organic growth. The gross margin improvement delivered from strong utilisation across the region and good fee rate progression. Management reports a continuing strong pipeline into the second half.
On the technology side, the group has been helped by two themes. Firstly, major players are increasingly looking for partners such as Alpha as they do not have the appetite or expertise to implement complex projects on their own. In this respect, they prefer partners who have global expertise such as Alpha. Secondly, there is a shift to the cloud from on-premise solutions among technology suppliers to the group's clients. For instance, both Charles River and SimCorp are undergoing major business model transitions, and this is resulting in significant projects.
Interim results
Source: Company accounts
Initiating forecasts
We forecast net fee income to rise by 41.4% to £138.5mln in the current year, by 14.6% in FY23 to £158.7mln, which includes a full period contribution from Lionpoint and by 8.3% in FY24 to £171.8mln. We forecast adjusted EBITDA to rise by 38.1% to £30.0mln in the current year, and by 12.4% in FY23 to £33.7mln and by 11.3% in FY24 to £37.5mln.
We have conservatively assumed that growth in consultant headcount will moderate, with the UK rising by c 3% per annum in 2023 and 2024, while the US and Europe and Asia grow at c 5%. We assume NFI per consultant (averaged over the year) eases back in the US and UK in the second half and into 2023. We note that utilisation rates are currently above normal at above 75%, and a reversion to normal rates of around 70% would result in an approximate 7% decline in NFI per employee, before any price increases. The utilisation rates reflect the time that consultants, especially directors, spend on business development, as well as training and on-boarding.
We assume UK gross margins ease back slightly as utilisation rates normalise while US and Europe & Asia progress towards the group average over time.
Source: Company accounts and Proactive Research
Profit and loss
We forecast underlying administration expenses to rise by 68.7% to £25.0mln in the current financial year, then increase by 15% in FY23, which partly reflects the full-year contribution from Lionpoint, and by 7.5% in FY24. Consequently, we forecast adjusted EBITDA margin to ease back to 21.7% in the current year, easing further to 21.2% in FY23 before recovering to 21.8% in FY24. Our assumptions take into account the uncertain economic outlook, including the ongoing pandemic, rising inflation and the battle for talent. We assume a normalised tax rate of 26% going forward. On our forecasts, adjusted EPS (earnings per share) rises by 22.8% to 18.3p in FY21, then by 7.7% to 19.7p in FY22 and by 6.6% to 21.0p in FY23.
Source: Company accounts and Proactive Research
Cash flow
The group reverted to more normal levels of cash conversion in the first half at 58%, which is in the normal 55-70% range. Last year's first half benefited from £7.0mln of COVID related deferrals.
First half acquisition costs amounted to £26.2mln. This included £25.6mln for Lionpoint (including £0.7mln deferred payments, less £2.1mln of cash acquired) plus the final £2.1mln Axxsys deferred payment as well as £0.6mln of Lionpoint acquisition-related costs. The issue of ordinary capital reflects the £30mln net proceeds from the placement in May.
Source: Company accounts
Capital structure
The group retains a strong balance sheet, with net cash of £40.0mln. In addition, the group has lease liabilities of £2.1mln and acquisition liabilities of £39.5mln, giving the group an overall net debt position of £1.6mln. Acquisition liabilities primarily relate to Lionpoint (£29.4mln) along with £4.8mln remaining of Axxys and £5.3mln for Obsidian.
Group equity in the period was boosted by the £30mln net proceeds fundraising in May and hence the overall net debt ratio is just 1%.
In addition to the cash position, the group retains a £20mln undrawn revolving credit facility.
Alpha continues to hunt for strategic acquisitions, and Lionpoint is the blueprint for future acquisitions.
Source: Company accounts
Key investment ratios
The table below reveals that the business is highly cash generative, with low capital investment, and generates high returns on capital employed. We are conservatively forecasting cash conversation at 80% over the next three years, which compares with above 100% over the last three years and management targets a 90% conversion. The group's ROCE has been comfortably above 20% in the previous three years and has been rising as the business scales. Based on our forecasts the group is set to continue to generate ROCE comfortably above 25%.
Source: Company accounts and Proactive Research.
Note: *Interest amounts paid of £1,431k in FY17 and £5,469k in FY18 were not included in the adjusted profit
Peer analysis
The stock's valuation continues to look attractive relative to both its UK and international peers, especially when taking into account the rate of decline in the valuation metrics over the next year.
Peer analysis
Source: Regulatory news, company websites and market sources. Alpha FMC data are generated from Proactive Research forecasts.