Alpha FX Group PLC (LON: AFX): Marked a 10-Year Track Record of Growth with Increasing Addressable Market

Incorporated in 2010, Alpha FX Group PLC is a FTSE AIM 100 listed Company,which deals in the provision of foreign exchange services for corporates exposed to currency market volatility. The Company's activities range from initial design and implementation of hedging strategies, to ongoing management and monitoring of currency risks and the provision of technology solutions. It has two reporting segments – Institutional and Corporate. The Company has its online international payments platform, Alpha Pay. The Company provides payment solutions to more than 600 organisations in over 30 countries. For FX risk management clients, the Company focusses on medium to large businesses with turnover between GBP 10 million to GBP 50 million that are materially impacted by currency volatility. AFX is listed on the London Stock Exchange since 7^th April 2017.

 
(Source: Annual Report, Company Website)

Key Fundamental Statistics



Segment Analysis

Operationally, the Company bifurcates its business into four segments, namely Corporate London, Institutional, Corporate Toronto, and Alpha Foreign Exchange. By product, the Company distributes its revenue by four products being Foreign exchange forward transactions, Foreign exchange spot transactions, Option contracts, and Payments and collections. Geographically, the Company major assets are distributed among the UK and Canada. 


(Source: Annual Report, Company Website)

Measuring Performance Against Strategic Objectives by Using Non-Financial KPIs
 

1. The number of customers increased by 34 per cent in FY19 as against FY18.

2. The front office headcount surged by 45 per cent in FY19 as compared to FY18.
 

(Source: Annual Report, Company Website)

Synopsis of Recent Developments – Management Changes

19^th May 2020: James Carey joined the Alpha FX Group as Director of Technology.

20^th April 2020:The Company’s Chief Operating Officer, Henry Lisney, decided to leave his position from 20^th October 2020.

7^th April 2020: The Company issued 2,715,442 new ordinary shares for raising a total of GBP 20 million, wherein Liberum Capital Limited acted as a sole bookrunner.

Top Shareholders Statistics

 

Update on the Trading Performance and Measures taken to Tackle Covid-19 Pandemic

On 30^th March 2020, Alpha FX Group released an update on the trading performance post-issuance of full-year results as on 31^st December 2019 and the impact of covid-19 on business performance. The Company posted robust performance in Q1 FY2020, despite the imposed lockdowns and slowdown in global trade. At present, AFX is not been able to forecast the impact of uncertainty and expect a decline in the activities related to forex and cancelling of commercial activities for clients. The Group expects its revenue and adjusted earnings to be in line with FY2019 and increase in bad debt provision due to present macro conditions. The increasing impact of coronavirus together with the collapse in oil prices led to a sharp fall in the value of some currencies and has impacted many clients of the AFX. The Group has created a temporary shortfall in cash, to support its clients. The Company is confident to deliver a revised forecasts and FX requirements for the year from existing and new clients. The Group has a strong liquidity position and cash balance since the beginning and remained the same in the uncertain period. The net assets stood at GBP 57.6 million in FY2019, reflecting an increase of 18 per cent. AFX revenues from non-forward products surged to 30 per cent in FY2019 from 15 per cent in FY2018. The Group expects revenues from non-forward products to increase, driven by expansion in product offering and increased traction from Alpha Payment Solutions. The Company is working proactively to maximise the collateral amount during the uncertain period and is hedging non-major currencies. The Board has decided to cancel the payment of final dividend for FY2019. The position of Alpha remained well-balanced across 4 major traded currencies.

Operational Highlights for the financial Year 2019

In the financial year 2019, AFX increased its client numbers by 34 per cent to 648 from 482 in FY2018. The Group also managed to increase its revenue per client by 12 per cent to GBP 54.6 thousand in FY2019 from GBP 48.7 thousand in FY2018. The number of employees also increased to 124 in FY2019 from 82 in FY2018 and 43 per cent of employees holding equity interest for long-term in the business. The cash balance remained strong without any debt to support client hedging programmes and winning a new client. The Company shifted its headquarters to Paddington and its Alpha Canada and Alpha Payment Solutions divisions building strong momentum. The Group launched E Share Growth Scheme, and Alpha Institutional division is the core revenue contributor.

Financial Highlights – Strong Financial Performance in Financial Year 2019 (31^st December 2019)


(Source: Annual Report, Company Website)
 
For the financial year ending 31^st December 2019, driven by an increase in the average revenue per client, the revenue increased by 51 per cent to GBP 35.4 million as against GBP 23.5 million in FY2018. The underlying operating profit surged by 47 per cent to GBP 14.7 million in FY2019 from an underlying operating profit of GBP 10 million in FY2018. The reported operating profit improved by 41 per cent from GBP 9.7 million in FY2018 to GBP 13.7 million in the financial year 2019. The PBT (profit before tax) stood at GBP 13,545,263 in FY2019 versus GBP 9,731,779 in FY2018. The Profit for the period (including comprehensive income) increased to GBP 11,019,869 in the financial year 2019 from GBP 7,820,697 in FY2018. The underlying basic earnings per share surged by 33 per cent to 30.1 pence in FY2019 from underlying basic earnings per share of 22.7 pence in FY2018. The reported basic earnings per share stood at 27.7 pence in FY2019 versus 21.8 pence in FY2018.

Financial Ratios - Strong Profitability Margins versus Industry Median

 

The reported EBITDA margin, Operating margin, Pretax margin and Net Margin stood at 43.10 per cent, 38.7 per cent, 38.3 per cent and 31.1 per cent, respectively, for the financial year 2019. Reported profitability metrics were higher against the industry median.The Return on Equity of 20.1 per cent in the financial year 2019 stood higher than the industry median. On the liquidity front, Alpha FX Group Plc’s current ratio was lower than the industry median of 2.08x. On leverage front, the assets-equity ratio of theAlpha FX Group Plc’s was 2.44x, which was lower as compared to the industry median of 2.79x.

Share Price Performance Analysis

Daily Chart as on 16^th June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On June 16, 2020, at the time of writing (before the market close, at 11:14 AM GMT+1), Alpha FX Group Plc shares were trading at GBX 766.00, up by 1.46 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,370.00/GBX 465.00.

Bullish Technical Indicator

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Method 1: Price/Earnings Approach (NTM)

 

To compare Alpha FX Group Plc with its peers, Price/Earnings multiple has been used. The peers are JDC Group AG (NTM Price/Earnings was 67.19), Baader Bank AG (NTM Price/Earnings was 43.56), Charles Stanley Group Plc (NTM Price/Earnings was 25.79), Swissquote Group Holding SA (NTM Price/Earnings was 18.33) and Argentex Group Plc (NTM Price/Earnings was 16.26). The Average of Price/Earnings (NTM) of the company’s peers was 34.23x (approx.)

Method 2: Enterprise Value to Sales (NTM) Approach
 

To compare Alpha FX Group Plcwith its peers, EV/Sales Flow multiple has been used. The peers are Swissquote Group Holding SA (NTM EV/Sales was 15.14), Flatex AG (NTM EV/Sales was 8.90), Argentex Group Plc (NTM EV/Sales was 6.36), Jarvis Securities Plc (NTM EV/Sales was 5.67) and CMC Markets Plc (NTM EV/Sales was 2.76). The Average of EV/Sales (NTM) of the company’s peers was 7.70x (approx.)

Alpha FX Group PlcVs FTSE AIM 100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five year, Alpha FX Group Plcshare price has delivered 206.40 per cent returns as compared to negative 3.19 per cent returns of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last five years.

Industry Outlook Dynamics

As per the report (published in October 2019) by Allied Market Research, the global risk management market size is projected to grow by a compounding annual growth rate of 14.6 per cent from 2019 to 2026, to reach around USD 18,405 million by 2026. The market growth is dependent on the ability to manage the high volume, retaining high-quality clients, minimal trading costs, high transactional transparency, and 24×7 trading opportunities.

Growth Prospects and Risk Assessment

The Company has made significant progress in both new and existing markets during the financial year 2019. The management looks confident for the upcoming opportunities with new product offerings. On 2^nd April 2020, the Company signed a legally binding settlement agreement, which will ensure a swift recovery of the full amount owed and will increase the liquidity in the business. Despite the economic turbulence, the Company’s performance is in line with expectations. During the FY19, client number surged by 34 per cent and the average revenue per client increased by 12 per cent, which underpins the potential for future growth. The Company has been focussed on its services and customer support, which has resulted in a higher level of customer satisfaction. The Group has a strong financial discipline, which helped them to have a robust and effective balance sheet position. The Company’s newly launched operations into new markets and products are exciting and have enabled to diversify the revenue streams without compromising the focus on high-value customers and prospects.

However, the Company’s performance is subject to certain liquidity and credit risk arising from the volatility presented by the COVID-19 disruption. Moreover, there is a constant risk of failing to adhere to legal and regulatory requirements. To meet the new regulations, the Group needs to implement new processes, failing to do so would increase the compliance risk. The business operations are impacted negatively due to the foreign exchange rate fluctuations.

Business Outlook Scenario

The Group has shown decent financial performance in the financial year 2019 and trading for the first quarter of the financial year 2020 remained robust, despite uncertainty due to covid-19 outbreak and oil price decline. The Group has made significant progress in its new divisions, Alpha Canada and Alpha Payment Solutions. The Group’s revenue from non-forward products continues to increase and is expected to carry the same trend, due to product offering expansion and increased traction from Alpha Payment Solutions. AFX continues to explore substantial opportunities and making investments to achieve significant growth. The Group expects its revenue and adjusted earnings to be in line with FY2019 data.

The Group is confident to deliver revised forecasts and FX requirements for the current year from existing and new clients. The Company has a decent liquidity position without any debt to support the client hedging programmes. In the financial year 2019, the net assets increased by 18 per cent to GBP 57.6 million. The Group has a strong management team with robust technology system to tackle the uncertain period.

Over the course of 3 years (FY16 - FY19), the Company’s revenue surged from  GBP 8.48 million in FY16 to GBP 35.38 million in FY2019. Compounded annual growth rate (CAGR) stood at 60.99 per cent.

Based on the decent growth prospects and support from the valuation as done using the above two methods, we have given a “Speculative Buy” recommendation at the current market price of GBX 766.00 (as on 16^th June 2020, before the market close at 11:14 AM GMT+1), with lower-double digit upside potential based on 34.23x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 7.70x NTM EV/Sales (approx.) on FY20E sales (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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