Alpha FX (AFX)

Hi,
In a mash-up of Maynard’s portfolio review post, and Mr Beddard’s Ben Graham curve analysis, I thought I would look at my 50 individual share-holdings, and try to find any risk in my porfolio for those shares:

  • currently on a high valuation but

  • unaccompanied by a similar high potential reward.

One company on a high rating was Alpha FX (AFX):

TIDM Name Sector PE Price to Turnover Gross margin ROCE (ex goodwill) 5y av.
AFX Alpha FX Group PLC Investment Banking and Brokerage Services 66.6 18.6 62 38.1

But I think this one may be accompanied by high potential reward, as detailed below!

The market opportunity for AFX and similar companies is to use technology to offer the same hedging opportunities as have been historically enjoyed by FTSE100 companies who have historically had their own treasury departments, or could afford the big fees of the banking establishment.

AFX offers lower fees vs the established banks (so clients may move from the banking establishment to AFX). The cheaper fees also mean the potential market has grown to include medium to large companies, internationally. Mr Tillbrook, the CEO, must have seen a decade or so ago when he set up the company. AFX say they have only captured 1% of the possible market. The turnover to 31.12.20 was £46.2m, so this implies a total estimated market of £4.6bn.

It’s an interesting business model - there are no up-front fees charge to clients with fees being on a transactional basis. Staff are remunerated by a slice of the revenue which they into the business. I guess this is why the CEO says that staff tend to stay either for 2 weeks or 10 years, because the staff would lose a large portion of their income were they to switch employer after a few years.

Pros:

  1. Great staff culture. Mr Beddard puts it better than I ever could, here. You may look at the pictures of the office in it’s annual report and think it’s a bit flash etc, but the way the CEO (Morgan Tillbrook) puts it is, if you appeal to every type of person you become an average place to work by default, so they appeal to a certain type, which leads to a happier ship. Huge detail on staff culture is available in the annual report . ‘Work hard, live well’ is the reasoning for the commitment of a long working week by staff.

  2. Long term outlook. The CEO talks about looking at 2024 and 2025 here

  3. The CEO is 38 years old and was the founder. He is a material shareholder with 16% (market cap £868m). Decent shareholder register otherwise, as well.

  4. The company floated in 2017, so any pre-floation wrinkles should have been ironed out by now. Also, there is greater credibility with clients as time goes by, which may allow them to catch bigger fish.

  5. Only 132 employees. Rightly or wrongly, I tend to value companies with fewer, better paid employees more highly.

  6. Possibly a future fintech company, with another business emerging from this company. They have split the business between FX and Alternative Banking (i.e. Payments, receipts and accounts). The Alternative Banking side is staff-wise split between 80% back office and 20% sales, whereas FX is 20% back office and 80% sales. Alternative Banking was only c.20% of the business (in the 2020 accounts) but is growing more rapidly than fx.

  7. AFX appear to be able to sell in additional services to existing clients (+11% revenue per existing client in 2020), so existing clients are a potential new revenue source as well as attracting new clients.

Cons:

  1. They were in hoc for £30m from a client who couldn’t come up with their margin collateral. To put that into perspective EBIT for y/e 2020 was £17.5m. Payment plan being followed now, but it raises a question about their risk management. AFX is actively trying to diversify it’s client base now and publishes client numbers on their website. Director appointment to manage risk, going forward

  2. I don’t really understand derivatives accounting, so I’m taking something on trust here from the accounting standards and auditors.

  3. The CEO has a penchant for motor-racing. What happens if he has an accident? They say they have succession plans in place for all team leaders.

  4. The major banks may respond competitively at some point. I question how they can do this without purchasing one of these smaller companies, though.

Competitor analysis:

Based on share price, the market appears to think AFX (Market Cap £868m) is ‘winning’ against Record (Market Cap £159.2m), and Argentex (Market Cap £105.3m). I need to look at Record and Argentex in more detail, though:

LSE_REC

Argentex may well be the value pick. Maynard wrote an excellent article on both AGFX and AFX, here. I worry that scale may still be an issue for AGFX and REC when selling in to prospective clients.

Turnover
Taking 2017 turnover as a base year, AFX is increasing it’s turnover more rapidly and so gaining market share vs it’s competitors. Has Record given up it’s first-mover advantage? In 2014, AFX’s turnover was £3m vs REC’s £19.9m. For 2020, AFX’s t/o was £46.2m vs REC’s of £25.4m.
image
(2022 is forecast as is 2021 afx)

Balance Sheet - looks excellent to me, assuming risk control is now adequate!

So, that is all that I have I got!! Happy to hold for now, especially until I know how the Alternative Banking division has progressed.

Year-end 31 December so maybe there will be a year-end trading update around Jan 11th…

Merry Christmas,

Ben

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Hi Ben

Many thanks for the great write-up. Not a share I have really looked at before, but one or two points from a quick skim.

I think Alternative Banking is a significant development, as it appears to be more straightforward operation. The downside with AFX (and AGFX) has always been (at least for me) understanding all the collateral requirements of the main FX hedging operation. As you say :point_down:

Alternative Banking via the Alpha Platform Solutions (APS) division is I think a more traditional fee-based service with conventional cash collection.

The last H1 figures showed APS with sales of £8.2m and profit of £3.6m, which compares to the preceding H2 of sales of £5.5m and profit of £2.3m.

So an extra £2.7m of APS sales led to an extra £1.3m of APS profit, indicating the incremental profit on extra sales is very impressive. This APS division started only last year but now represents 23% of group profit. The rapid start, profit ‘scalability’ and future potential of APS is understandably helping to support the rich share-price valuation.

He won a race! I would say the issue here is whether he will become distracted by this pastime. Motorsport can be all-consuming.

Record is mostly an FX asset ‘manager’, whereby financial institutions clients pay REC to hedge the FX movements of their equity portfolios. As far as I know, REC does not undertake the same FX transactions as AFX and AGFX.

Maynard

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