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Just purchased another £5,000 with a minute to spare. More buying to come...
I make it that the maximum price the company could have paid for shares in the buyback was £16.18 on Monday& Tuesday and £16.30 today. Admittedly my maths is a bit dodgy.
On reasoning, they went into quite a bit of detail on capital allocation in the half year report;
"Alongside allocating capital to grow the business, the Group intends to continue with its progressive dividend policy. When taking all of the above into consideration, we believe the Group's current cash position creates significant return-enhancing opportunities. We will of course review our cash position on a regular basis, and if we feel it becomes excessive, will look to adjust."
Given the Q4 ACB of £2.1b at a blended rate of 3.8% would have generated £20m in it's own right, I suspect it's simply genuinely excess cash + the share price had / has become disconnected from reality. It also doesn't make any sense to let your share price become depressed when you have the means to decisively intervene.
I was also thinking about why they did the buy back. The obvious reason is that they have lots of cash and the shares are cheap. But they may also have been worrying about entry to the FTSE 250. Market cap had fallen to 650m. It would need to be around 500m at least to make the FTSE 250. Further SP declines could have put that in jeopardy, which would have been very embarrassing. I wouldn't be surprised if that was the main reason, as generally I think they're more focused on growth than returning cash to shareholders.
Thanks for these calculations ShearClass. Interesting to look at volume too in this context. A few days ago a lot of shares were changing hands. Today volume has been tiny. Yesterday they bought back 20k. The buy earlier of 10k, which dwarfs all other trades, could well be a buyback. And the price immediately jumped 20p or so. If this pattern repeats only one way the SP will go.
No messing around on the buyback front, 20k shares taken out of circulation for £317k. Hopefully they continue to sweep up forced selling and reduce the share count further.
Free float could become really tight; as per their website >1% holders control a cumulative 85.14% of shares. I also have the following holders just below the 1% level, as per simply wall street register info, annual reports & II quarterlies;
Clive Kahn (chairman - 0.84%
Schroeders - 0.82%
Phoenix Asset Management - 0.82%
Rights & Issues PLC - 0.78%
River & Mercantile - 0.7%
Unicorn - 0.25%
Other PDMR's- 0.15%
That gets you to 89.5% of shares, however that doesn't include vested employee shares.
So far there have been~2.5m shares issued as part of B, C & E schemes. That's another 5.8% of SII, leaving just ~5 - 10% genuine free float depending on how many employee shares have been sold. Given these will be senior managers & long serving employees who are committed to the CEO's vision, I can't imagine many being sold, so likely towards the lower end of that scale.
So if Alpha take £20m out of circulation at an average price of £18 (1.11m), they would reduce total share count by ~2.5% but more importantly take between 25% and 50% of free float out of circulation.
Will be interesting to see what the impact of that is!
Yep, a strong previous support zone which was further reinforced by the 3.8m shares traded on Friday & the buyback announcement adds to it further.
As I said earlier last week, I found it unbelievable that shares peaked at £13.50 in January 2020 giving an at the time enterprise value of £426m (£464m cap, £38m cash), yet on Friday's low the EV was £460m...
Since that time the business has more than tripled underlying operating profit, added £140m net cash, diversified it's business model substantially & has an extremely material new income stream that enables muscle flexing like this morning.
It's a high quality growth stock trading like a value stock - get those buckets out!
1500p is a strong historical support level. The signified buyback around this price surely makes it almost impenetrable?
Makes sense. Anyone with half a brain can see these are chronically undervalued and Morgan Till took definitely has a whole brain. Personally I'd quite like the SP not to rise too quickly so they can buy back cheap and I have time to accumulate at these silly prices.
Great news indeed, feels like the right level at £20m yet will be covered by around 3 months interest income. Onwards and upwards from here!
Great to see a share buy back programme has been announced. As per my post on the 19th Jan, I suggested the company should be using some of the cash to buy back shares at these ridiculously low prices.
This should put a floor on the share price. I will definitely be adding here again this morning .
And, last summer, BG closed their British small companies fund..
"Its largest holdings included Burford Capital at 8.3%, Alpha FX at 6.6% and promotional products supplier 4imprint at 6.3%."
https://portfolio-adviser.com/baillie-gifford-closes-141m-british-smaller-companies-fund/
Fair to say, the Uk small-cap space is an infuriating place to be right now.
So in summary, I think it's a multitude of factors at play here, one of which could be some tactical rotation out of long term winners & into recovery plays to generate fund alpha.
Fund outflow driven selling from Liontrust, Jupiter & Cannacord has been a long term headwind which IMO capped the share price at £23
The proposed move to main market will also mean that any fund holding Alpha in an AIM IHT portfolio will be a forced seller, this could apply in part to any of the 18 names I listed earlier or those below the 1% level
I also think UK based funds like Kabouter could be selling to increase US tech / decrease UK exposure, but this is nothing more than speculation
The one fund that could have 'traded' the interest rate hedge is Abrdn, as there are lots of examples where they have taken large positions during Covid and then unwound them aggressively into an illquid market, crystalizing losses. The 3.8m volume yesterday certainly saw one large holder reduce or exit and another take a big position. Will be interesting to see what has moved in the next update.
Either way, the culmination of the above has created the cheapest valuation since April 2020, happy days if you are a long term believer.
So we know what's been happening with the shareholder base, but why have these funds been behaving like this? Take River & Mercantile as an example.
https://river.global/our-funds/fund-centre#/fund/GB00B1DSZS09/es-river-and-mercantile-uk-listed-smaller-companies/GB00B1DSZS09/document/
In Q1 2023 Alpha was the largest position in their UK Smaller Companies portfolio at ~£12m value or roughly 630k Alpha shares at the Q1 closing price of £19.30, which was 1.48% of the company.
https://instinctdigital.blob.core.windows.net/funddata/644b73606bafa-ES_RandM_UK_Listed_Smaller_Companies_Fund_2023Q1.pdf
In Q2 the fund said the following;
"Three other top ten positions delivered strong relative performance. Alpha Group International (+0.3),
Moonpig (+0.4) and Hollywood Bowl (+0.3) each continue to deliver. We view each as materially mis-priced
given the strengths of each business to generate attractive return on capital and growth."
But note that Alpha had been reduced to a 2.94% portfolio holding, behind Serco, Conduit, Hollywood Bowl & Indivior
By Q3 it was no longer a top 10 position, down to 2.17% and this continued into Q4 with the holding down to 1.57% (~300k shares)
So in Q2 they believed Alpha was materially mispriced, but over the year they sold 328k shares! Why sell then?
Note that fund AUM in Q123 was £364.5m, this had fallen to £329.2m by Q4, with almost all of that down to redemptions (performance was -1.4%). So in order to initiate new positions they have to reduce somewhere. I do also suspect there is an element of @koolhead's theory of repositioning towards shares that were heavily punished by rising rates / cost of living crisis - i.e. Sigmaroc, On the Beach.
Overall, I suspect they see Alpha as a long term play which they will wax & wane, adding back the shares sold this year when they take profits elsewhere... The fund outflows mean that they have to swing trade to remain active, and as the UK market has been so stagnant, tactically reducing a winner like Alpha would likely be seen as a logical decision
@koolhead, this is where Alpha's transparency around providing quarterly holdings snapshots down to the 1% level is so useful.
Some UK funds definitely play musical chairs and try to time the market, but there is more at play here. The market first became aware of the hedge in October 2022 when shares were £16 (35% down from their April 22 highs). I've got the fund data for each quarter from 300922 to 31223. Here are the start and end positions of the major holders;
- Liontrust and 11.64% to 10.07%
- Cannacord (inst) 6.82% to 3.76%
- Jupiter 6.02% to 4.74%
- JP Morgan 5.1% to 6.23%
- Cannacord (retail) 3.76% to 3.59%
- Soros 3.65% to 2.96%
- Fidelity 2.82% to 4.72%
- Martin Currie 2.65% to 2.28%
- Kabouter 2.51% to 1.19%
- Baillie Gifford 2.44% to 1.44%
- Aegon 1.9% to 1.65%
- Chelverton 1.73% to 1.56%
- River & Mercantile 1.71% to 0.7%
- Arbdn 1.65% to 4.04%
- Dowgate 1.59% to 1.07%
- M&G 1.5% to 1.4%
- Premier Miton 1.48% to 2.57%
- Blackrock 1.18% to 1.3%
So of those 18 institutional holders who have been on the register since the interest rate hedge was announced, 13 have reduced and 5 have increased. The movement of these 18 holders over the period of the hedge is -4.98% / 2.1m shares. Over the annual period from 30/09/22 to 30/09/23 it was -2.84%, so a slight increase in Q4 but the trend was the same.
More to follow on this...
Not sure the double edge sword analogy fits here, given that the company seems (now) to benefit (in different ways) from either scenario, although I do appreciate the point you are making.
I suspect the current share price is driven predominantly by technical, as opposed to fundamental, factors. It's had a great run over the last few years, and a pull back is not surprising. As others have mentioned the share price is now at a relatively familiar support level, and can hopefully find that support and advance much further. Some good discussion on here about this company, and I appreciate the analysis, can only see upside in the medium to long term personally.
I have another theory about why the SP is falling. If you're a fund manager, you might be a forced seller of something but usually you could choose what to sell. So why sell Alpha? Maybe it's the interest rate hedge. For Alph falling interest rates is a double edged sword. So if you're expecting interest rates to be cut, as almost everyone is, wouldn't you place your bets only with companies that stand to profit from cuts? I'm certainly expect a lot of upside from all the companies I own that lost a lot of value in 2022 but that wasn't really the case with Alpha because of the other income.
Nice work SC. Your analysis reinforces just how incredible the value on offer here is. I added again today
Huge volume just gone through at £14.75, looks like the highest since IPO if you exclude secondary offerings. Incredible to be trading at 15x underlying profit before tax, and that's clearly ignoring the £177m cash pile + huge interest income inflows.
At 11x LY EV/Profit before tax, this surely has to be the cheapest shares have ever been. Just checked the placing in April 2020 & that was done at ~15x LY EV/PBT, so maybe only the crash to £4.70 on 30/03/20 could beat the current valuation, and that was at a time of unparalleled uncertainty!
Glad to hear @golfnut, Alpha leave plenty of breadcrumbs but the scale of Morgan's ambition is hard to comprehend. I certainly can't wait to read the prospectus for the FTSE premium listing!
Over the last 12 months Craneware, Yougov & Global Data all had falls similar to the one Alpha is suffering, they all then rebounded as rapidly as they fell. All are illiquid midcaps trading on SETSsq, and the falls were likely driven by one exiting II. Time to try and switch off from here until results - easier said than done.
* is in no doubt that the ABS division......
I agree with your assumptions @ShearClass.
As with everything Alpha does, the growth of the ABS division has been astonishing. Your logic is sound and I agree with your thesis. Once commercial activity picks up, it stands to reason that account migrations will follow suit. Judging by what he had to say in the podcast you shared, Morgan Tillbrook is no doubt that the ABS division will continue to succeed. I quote:
“Its very much the ambition of ours to become the global leader of banking solutions to the alternative investment market”………”The reputation of Alpha within that space is growing exponentially & we are investing significantly in this opportunity”
Big test of the long-standing trading range here. It dropped to 15.00 on 1 Nov 2022 and 14.55 on 8 March 2022. Odds are it will rebound. If it breaks downside there's probably resistance around £13 which is where it was in March 2021. I'm heavily invested at an average of around £13 so getting rather annoyed about the current fall, though will definitely top up at this level or below when more funds are available.
Agreed on the fact it shouldn't matter either way given the current valuation... I'd say average cash balance growth is a more important driver of interest income than the average interest rate received? I've done some high level work on it which would be good to get some thoughts on;
Preqin (who Alpha regularly reference as the Alternative investment industry go to) estimated global AUM as $16.3t / £13t at end 2023; https://delano.lu/article/preqin-alts-2028-report-indust
In their last annual results Alpha said; "Preqin tracks 160,000 funds globally and we estimate that each fund will have on average ten assets, each requiring accounts". So that would be 1.6m bank accounts at end 2022, which if we assume growth of 10% in 2023, would reach 1.76m
That would put Alpha's market share at 0.37% (vs 0.26% in FY22, 0.12% in FY21), applying this to the industry TAM of £13t tells you that the bank accounts under Alpha's control should contain ~£48b of assets, if they are representative of the industry! Of this total, at end Q4 £2.1b was held in cash, which would equate to 4.36% of assets. To me this seems in line with what I would expect an SPV or fund to hold, and it seems sensible as a model assumption?
Another piece of the puzzle is the average cash balance per client, which has fallen from £458k in FY21 to £383k last year to £323k this year. I think this is likely due to less account migrations, as flagged in the half year report;
"With funds less concerned about offboarding and facing numerous other challenges in this environment, this has understandably pushed account migrations down the priority list for both fund managers, and also the service providers that support them, and who need a good reason to suggest a migration to the fund managers. New SPV creation may be slower in the current environment, but in the long-term remains an enormous opportunity in its own right, with new SPVs opened every year, as existing SPVs come to the end of their lifecycles."
If we take a bit of a leap and assume existing accounts keep a consistent cash balance, then we can say that;
FY22 saw 2454 accounts added, which increased average cash balance by £800m / £326k per new account
FY23 saw 2300 accounts added, which increased average cash balance by £500m / £217k per new account
To me, those figures back up there being less migrations and more brand new SPV / fund account openings, many of which presumably won't be funded / active immediately, and so reduce the average cash balance figure.
If lower interest rates encourage more migrations, more deal activity & more FX transactions then I suspect that net net, ABS revenue should continue to grow strongly, particularly non interest income revenue.
Be great to get others thoughts on this / confirmation that the logic seems on point...
@Shearclass. I basically agree with your point about headline PBT falling back. But given how much other income is contributing it is possible that if rates fall for the next 2-3 years that any growth in the cors business will be offset by falls in other income. The reason this is not a worry, for me at least, is that even steady PBT of 115 equates to an absurdly cheap valuation and we can also expect growing client balances to partially offset falling interest rates.