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This is a great way to play outsourcing growth in the asset management industry
Thursday 23 Nov 2017 Author: David Stevenson

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Many investors are wary about recent stock market floats as they want to see how a company performs as a listed business before investing.

We can understand why many people are nervous about new market entrants, given several recent examples of companies issuing profit warnings soon after IPO (initial public offering).

However, there occasionally comes along a newly-floated business which has a solid track record and looks like it is worth backing before the wider market cottons on to its existence and earnings potential. Alpha Financial Markets Consulting (AFM:AIM) is one such company, in our opinion.

What does Alpha do?

Alpha provides support services to almost every aspect of asset management; namely what is called the front, middle and back offices.

The front office is the revenue generator of a firm and its staff will be fee generators. Middle office handles risks and strategy while the back office looks after regulatory compliance and data reporting.

Alpha’s clients include 75% of the world’s largest asset managers by assets under management.

The company seems to have made hay as the large managers outsource more and more of their work to specialists like Alpha. This is definitely a growth industry and Alpha only has an estimated 8% to 10% share of addressable markets, according to estimates by investment bank Berenberg, so still plenty of opportunities to chase.

Earnings profile

Alpha has increased revenues at a compound annual growth rate (CAGR) of 37% between 2011 and 2017, indicating the growing need for the company’s services.

With European regulations such as the updated Markets in Financial Instruments Directive (MiFID II) coming in early next year, there will certainly be a lot of work to keep the company busy.

Earning before interest, tax, depreciation and amortisation (EBITDA) jumped from £2.2m in 2013 to £8.6m in the year to March 2017 with a 19% margin.

Berenberg analyst Sam England says: ‘We believe these strong EBITDA margins can be maintained at current levels, and consequently we estimate that a 10% CAGR in EBITDA 2018-20 is possible. These strong margins should help contribute to robust cash generation in the coming years as well.’

The company is seeking to move into other markets, potentially via acquisitions.

Alpha is currently trading on 17.2 times forecast earnings for the year to March 2019 with a 2.9% prospective dividend yield. We’re comfortable with this rating given that pre-tax profit is expected to increase by just under 10% in both the March 2019 and 2020 financial years.

Add in the appeal of net debt having this year been reduced to zero and the presence of high margins and you’ve got a nice little business. (DS)

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