Alpha Group International, High Growth Combined with Exceptional profitability.
Revenues have increased 35-fold in the last 8 years while maintaining operating margins above 40%.
Investment Thesis
Key points:
Revenues have increased 35-fold in the last 8 years while maintaining operating margins above 40%.
The market fears that the company will lose a large amount of interest income if interest rates go down, if this is not true or rates stay higher for longer, the stock has a lot of upside potential.
Management has mentioned its intentions to enter London's main stock market, another potential catalyst. This catalyst happened 2 months ago and big investors are buying the stock.
Alpha Group provides services that are in high demand by companies, if the macroeconomic situation is unstable, companies will be more protected against currency risks.
Today we live in a world full of uncertainty, especially when it comes to foreign trade, which causes greater instability and unpredictability in the foreign exchange market, so it makes sense for companies to hedge against currency risks. This is where Alpha Group comes in, in response to the growing need for advice to navigate the complex world of currency hedging, Alpha Group offers advisory services and technology solutions for companies, investment funds and other institutions. Thanks to their focus on customer satisfaction, they are managing to capture market share from the big banks.
Management is always looking to create synergies within its business segments by making acquisitions and increasing the number of services it offers to each client. Once a customer uses one of your services, they are likely to use your other products if they are needed by their company, because they have received excellent service previously. With their new Fund Finance segment, which I'll explain in depth later, they leverage their relationships with different hedge funds (which have already used their ABS services) to connect lenders (hedge funds) with borrowers (new or existing customers in need of financing), so lenders get interest from a solvent company or individual. as Alpha Group will make sure that the borrower is creditworthy, and the borrowers receive the financing they needed, in this way the customer experience is being improved and the company's profits are increased.
Competitive Advantages
Alpha Group has several characteristics that differentiate it from other companies that offer these services. Thanks to these differentiating characteristics, the company has been able to maintain margins of more than 40% year after year.
Investment in technology: Alpha Group invests a large amount of capital in developing technological solutions with which to offer a better service to its customers and be more efficient themselves.
Customer Prioritization: Alpha Group's goal is to establish long-lasting and quality relationships with its customers, for this they focus on offering a high-quality service to their customers. In contrast to the big banks that tend to sell overly complicated financial products to earn the maximum amount in commissions, Alpha Group prefers to offer simple products which are cheaper and more effective for the customer.
Synergies within the business: Alpha Group is creating a large number of synergies between its different business branches, offering customers an ecosystem of services that meet the needs of their business.
Business segments
Alpha Group currently has two core business segments, they also have two smaller segments that we will also talk about. Both Alternative banking solutions (ABS) and FX Risk management have grown exceptionally in recent years, maintaining high margins despite constantly reinvesting to continue growing, the last year interest income coming from ABS client balances represented a big part of total revenues.
FX Risk Management
1. Introduction:
The FX Risk Management division specializes in aiding corporate and institutional clients who engage in international transactions and need to buy or sell foreign exchange for trading purposes. This involves mitigating the impact of currency fluctuations to protect client performance and profitability. The division provides strategies and technologies to effectively manage currency volatility. With teams in several global locations such as London, Toronto, and Amsterdam. In addition, new offices have been set up in Madrid and Munich in the last year, this segment of the company serves a diverse customer base. The division runs in a non-cyclical market, working in different currencies and continents, which offers high diversification.
FX Risk Management accounted for 41.1% of the group's revenue at the end of 2023, therefore, it is particularly important that we analyze what are the factors that contribute to the success of this segment. The company focuses on giving the best service to its clients and the culture of the firm follows a series of principles that ensure that its employees provide the best advice to their clients, this company culture focused on offering the best possible customer service instead of trying to sell very complicated financial products at exorbitant prices that harm the client in the long run, It is one of the competitive advantages that Alpha Group has over other corporations that are dedicated to this sector, such as large banks.
2. Customers
Alpha Group works with corporate and institutional clients who need to buy or sell currencies for trading purposes. Thanks to the company's culture, Alpha Group is able to build excellent relationships with its customers.
The number of FXRM clients has grown at a staggering compound annual rate of 30.92%. Over the past year, this growth has slowed due to the difficult macroeconomic environment, macroeconomic uncertainty has led to a more conservative approach to forecasting and, therefore, to hedging against currency risks. They ended the year 2023 with 1071 customers.
In addition to the increase in total customers, the average revenue per customer has also been increasing, as since 2016 ARPC has increased by 51.09%.
3. Forward-looking statements.
Alpha Group is investing a great deal of capital in getting new talent and training it. In this way, and by expanding into more countries, the group aims to grow and gain market share in the foreign exchange sector. With the political and economic instability of many countries around the world, this sector presents great premises for growth.
This segment has experienced a slowdown in revenue this year due to macroeconomic conditions, conditions due to which companies have taken a more conservative approach to forecasting and, therefore, with their hedges. It should be noted that, although the segment has not grown at the rate it has historically done, it has continued to grow by 9.35% and has maintained margins despite the bad year. It is to be expected that FX Risk Management will continue to have strong growth in the long term as they are barely capturing 1% of the total market in which they operate.
Alternative banking solutions
1. Introduction
ABS was purposely created for fund managers, which typically require local accounts in key investment areas. These investment vehicles are often used to buy assets, sell them, or make distributions in certain countries. This business segment was recognized as an individual segment and has been reported individually since 2020, since then it has multiplied its revenue excluding interest by more than sixteen, and its total revenue by more than sixteen. This is because thanks to this business the group has the privilege of generating interest on its clients' balance sheets, due to this, they have generated £73 million in interest income (90.52 million dollars) this year. However, management remains cautious in case interest rates fall and continues to measure its operating margins without taking these revenues into account. Here you can see how quickly the total customer balance has increased in the last year.
Due to this situation, Alpha Group shares are really interesting, as they offer a lot of upside potential in the event that interest rates rise or remain high for a longer period of time, in the event that interest rates fall, the revenues of FX Risk management and the other segments will grow faster than expected due to the increase in trade flow, offsetting some of the loss of interest income.
Now let's look at the growth in customer accounts that this segment has had. As we can see, it's quite impressive, they didn't reach their forecasts for 2023, but they have still grown extremely fast, and management is convinced that they can continue to grow.
Other segments:
Alpha Group has started reporting individually on two new segments:
-Cobase, which was just bought this last quarter for 9 million pounds (11.16 million dollars), the company has generated $2 million pounds (2.48 million dollars) in the year 2023 which is an increase of 67% over last year, Cobase is a platform that offers services to more than 100 corporate clients currently.
-Fund Finance, this segment is totally new and its mission is to offer an online platform to connect lenders and borrowers by leveraging the connections that the company has with fund managers, with the aim of connecting them with interested lenders who may or may not be customers, creating a mutually beneficial situation for both.
CEO, Morgan Tillbrook
Morgan Tillbrook, who founded Alpha in 2009, has not only successfully led the company to date as CEO, but has also proved an unwavering commitment to its long-term interests. It is crucial to highlight the significant personal investment that Tillbrook continues to make in Alpha, holding 13.7% of the shares outstanding. This participation is not only a sign of confidence in the company's vision and future, but also ensures that its goals are deeply aligned with those of shareholders.
Tillbrook's ownership of such a sizable part of the company goes beyond a mere financial investment; It's a powerful testament to his faith in the company and his dedication to its continued success. This commitment ensures that the strategic decisions made are designed not only for short-term growth, but for the long-term well-being and prosperity of the company. By having a significant stake in the company, Tillbrook shares directly in both the risks and rewards, aligning its interests with those of shareholders in tangible and meaningful ways.
He has also initiated a buyback program of £40 million, with £20 million already purchased. Over the next year, the company plans to buy back another £20 million. Additionally, Alpha Group has almost £180 million in cash on their balance sheet, further solidifying its strong financial position. This clearly demonstrates his discipline in capital allocation.
Forecasting:
I have forecasted the business in three main segments, Risk Management, ABS and other segments which includes Fund Finance and Cobase.
I forecast that Risk management clients will grow at a 9% CAGR for the first six years and at a 7% CAGR for the last four, I also assume that average revenue per client will grow at a 4% during the first six years and at 2% for the last four.
I forecast ABS clients to reach 7150 in 2024 and that they will grow at a 10% CAGR for the following six years and at an 8% CAGR for the last three. I assume revenues will grow at the same pace as client numbers and the same is assumed with the cash balances clients will hold on to their accounts.
The “other segments” part is expected to grow much faster due to the big existing pool of services the group already has that may need these new services.
*Everything in millions of pounds except client numbers and average revenue per client.
I have assumed gross margins will remain at historical levels to calculate cash flows and EBITDA; I also have assumed that interest rates will remain at 2% in the long term to calculate interest income.
*Everything in millions of pounds and millions of shares, except per share numbers.
Valuation:
We use a 5% FCF yield as the exit margin even though it is quite conservative comparing it to historical yields. With these conservative assumptions we get an internal rate of return of 20%.
Risks:
Despite the fact that Alpha Group has stable margins and strong growth in both revenue and earnings, there are a few risks that we should be aware of:
Big banks improving their services: Alpha Group has managed to grow so fast because their main objective is to create long-term long-term relationships with the customer, however, if the big banks start to take a longer-term approach and invest in developing the technological tools that the company has, Alpha Group could lose its competitive advantage.
Interest rates: Another of the risks presented by the investment is interest rates going back to 0%, although this is not probable, we must at least take it into consideration
Conclusion:
Alpha Group is a high-quality company, with great fundamentals and competitive advantages that will expand as the customer base that uses the company's services grows.
Management is committed to carefully managing the company's funds and investing them only in the best growth opportunities.
As we can see, the company's share price represents a great investment opportunity for the medium and long term. The nature of the company provides some security to investors in the event that interest rates were to increase, so the company would be an interesting option to diversify your portfolio.