Strong annual results from Alpha FMC
Alpha Financial Markets Consulting PLC (AIM:AFM) (Alpha Financial Markets Consulting PLC (AIM:AFM)) reported a strong set of results for the year ended March. Net fee income surged by 61.1% to £157.8mln, slightly ahead of our forecast of £157.0mln. This reflected strong organic growth of 33.4%, less a 2.1% currency headwind along with a £29.2mln contribution from Lionpoint, which was acquired in May last year. Adjusted underlying earnings (EBITDA) jumped by 56% to £33.9mln (we forecasted £33.7mln). Cash generation was strong, with cash conversion at 112%, and the group ended the year with £63.5mln in cash and had no financial debt. The final dividend was increased by 55% to 7.50p and the total dividend by 49.6% to 10.40p.
Consultant headcount increased by 69.6% from 448 to 760 over the year, including 33 new directors and the wider Lionpoint team. Lionpoint, a US-based consulting firm focused on the alternative investment industry, has been successfully integrated and has been trading ahead of expectations. It brings global scale in alternative and other private asset classes and enables cross-collaboration opportunities on client projects. Offices were added in Denver, San Francisco, Sydney and Frankfurt, taking the group to 16 client-facing offices globally. The number of clients that the group supported increased to 718, up from 439 in fiscal 2021 (FY21). There was continued strong momentum in the group's insurance consulting offering, with the team doubling in size over the year and it has expanded into general Insurance and speciality client segments in the UK market.
Outlook and strategy
Management reports that the strong momentum has continued into the early part of FY23, and growth is supported by a strong pipeline of potential new business while the structural tailwinds that underpin demand for Alpha’s services remain robust. Nevertheless, management is mindful of the macro-economic backdrop including inflationary pressures and believes it is well-positioned to balance the risks of these pressures and continue to deliver attractive growth and margins.
The group's strategy continues to involve growing the business through geographic expansion in all regions, both organically and through selective acquisitions, with a particular focus on North America. It also involves extending the depth and range of client segment and service line offerings.
Constant currency organic growth was an impressive 33.4%
We have conservatively maintained our net fee income forecasts, noting the uncertain economic and geopolitical backdrop. Our forecasts translate to 7.7% organic growth in the current year and 2.9% in FY24. Adjusted EBITDA edges up, due to higher depreciation feeding through, while our earnings per share (EPS) forecasts rise by 1.5% and 2.0% in the respective years, due to lower assumptions for the average number of shares balanced by an increased FY24 tax charge. This leaves the stock trading on 17x this year's earnings, which looks attractive given the group's track record of growth, high return on capital employed and strong balance sheet.
The group ended the year with 760 fee-earning consultants, slightly ahead of our forecast of 755. This was due to strong growth in the US with the UK slightly below our forecast; however, UK margins were ahead of our forecast.
We have conservatively eased our forecasts for net fee income per consultant, and are maintaining our group forecasts of £170mln for FY23 and £175mln for FY24. We are maintaining our forecasts for end-FY23 and end-FY24 consultant numbers and margins.
Forecast changes
Fee earning consultant analysis
Source: Company accounts and Proactive Research
Income statement
While gross profit was slightly below our forecast, administrative expenses were also lower than we expected and hence adjusted operating profit was broadly the same.
Our adjusted EBITDA forecasts edge higher, as depreciation forecasts have risen slightly, in response to the reported figure. We have eased our assumptions for the weighted average number of shares and increased the tax rate to 27.5% from 20.0% in FY24 to reflect the increase in UK corporate tax rates which takes effect from April 2023. Consequently, our EPS forecasts have risen to 21.7p and 22.0p in FY22 and FY23, up from 21.3p and 21.6p respectively.
Income statement
Source: Company accounts and Proactive Research
Cash flow
We have made some small changes to our working capital forecasts. We are assuming that cash conversion falls back to around 80% over the next two years (see Key investment metrics table). We have increased our assumptions for acquisition costs to £20mln in both FY23 and FY24, which mostly relate to the acquisition of Lionpoint. Consequently, we forecast the group to finish FY23 with cash of £57.2mln, while acquisition liabilities will also decline as they are settled.
Cash flow
Source: Company accounts and Proactive Research
Capital structure
The strong cash generation continued during the current year and pushed the group's cash pile to £63.5mlm at year-end. After deducting leases and acquisition liabilities, it has swung to a total net cash position of £20.5mln. In addition, the group has a £20mln revolving credit facility which remains undrawn.
Capital structure
Source: Company accounts
Valuation
The group has attractive financials with low capital investment, positive working capital movements in recent years and growing/stable profitability margins. Cash conversion has been consistently strong and the ratio has risen for five years running, standing at an impressive 112% in FY22. Return on capital employed (ROCE) has also risen for five years running and stands at a superb 36.3% in FY22, based on our calculations. We are conservatively forecasting cash conversion to fall back to around 80% over the next two years, while we are forecasting ROCE to remain above 30% in the forecast period.
The group generated an adjusted free cash flow of £31.7mln in FY22. This equates to a free cash flow (FCF) yield of 8.1% at the current share price, after adjusting for the capital structure. Based on our forecasts, this would fall to 6.1% in the current financial year and rise to 6.4% in FY24.
Key investment metrics
Source: Company accounts and Proactive Research
*Interest amounts paid of £1,431k in FY17 and £5,469k in FY18 were not included in the adjusted profit