We would love to hear your thoughts about our site and services, please take our survey here.
London South East prides itself on its community spirit, and in order to keep the chat section problem free, we ask all members to follow these simple rules. In these rules, we refer to ourselves as "we", "us", "our". The user of the website is referred to as "you" and "your".
By posting on our share chat boards you are agreeing to the following:
The IP address of all posts is recorded to aid in enforcing these conditions. As a user you agree to any information you have entered being stored in a database. You agree that we have the right to remove, edit, move or close any topic or board at any time should we see fit. You agree that we have the right to remove any post without notice. You agree that we have the right to suspend your account without notice.
Please note some users may not behave properly and may post content that is misleading, untrue or offensive.
It is not possible for us to fully monitor all content all of the time but where we have actually received notice of any content that is potentially misleading, untrue, offensive, unlawful, infringes third party rights or is potentially in breach of these terms and conditions, then we will review such content, decide whether to remove it from this website and act accordingly.
Premium Members are members that have a premium subscription with London South East. You can subscribe here.
London South East does not endorse such members, and posts should not be construed as advice and represent the opinions of the authors, not those of London South East Ltd, or its affiliates.
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.
My reasoning for where we stand;
- Around 20 Institutional Investors playing musical chairs
- The fact the shares are on SETSqx, illiquid and controlled by the market makers (ps. one of those market makers, Berenberg, now own 1.15% / 500k shares which seems very unusual in my experience. First entered the 1% club 6 months ago)
- The diabolical status that the UK (and even more so AIM) has in world equity markets.
- The company downplaying interest income as a hedge rather than part of their business model
- The lack of proper analyst coverage (Peel + Liberum are the only brokers covering it)
- The lack of any Capital Markets Day providing medium term targets
- The fact it's transitioned from being an FX focused company at IPO into a fintech today (I'd bet most PI's still think it's an FX business)
- The fact it's appeared historically expensive vs other AIM FX stocks like EQLS, AGFX etc, due to it's chalk & cheese financial metrics
You could make a sensible argument that the ABS segment alone could be valued around the current market cap if it was listed separately...
@Koolhead, I just can't imagine any informed shareholder worrying about basic EPS shrinking if rates fall back a bit when shares are trading at
Another thing to be aware of is that, assuming that cash pile keeps on swelling at something like the current rate of 60m a year, the numbers Shearclass gives will get even sillier. That 501m it's worth (mcap minus cash) will shrink by a quarter in just two years.
There's also all the interest from their own cash. That alone could probably cover the divi.
I sometimes wonder if the current malaise reflects fear of interest rate decreases cutting the headline 115mil of PBT. Given that the core business isn't growing that fast this could make it look like the company was shrinking. So not sure I fully agree the market is just ignoring that (though some screening tools would miss it).
The other thing holding back the SP is probably also it's natural interest rate hedge. Whatever happens, looking at it glass half empty (as the market seems to be doing), is bad for Alpha.
But apart from mid 2020 when I first bought a big chunk this is definitely the best time to buy. I reckon this could X5 or X10 in the next 5-10 years if it can keep growing at a decent rate.
Just bought 643@£15.55. First purchase, been watching a while.
Any which way you dice it, the valuation makes zero sense. I keep questioning myself, what am I missing here? What does the market know that i don't? I've come to the conclusion that I'm right and the market is flat wrong hence my reference to the Charlie Munger quote.
I believe the market sold off the stock because:
1) Alpha missed its £117m revenue target for FY23
2) The house broker cut CY24 EPS forecast down from 85.8p to 76.8p
3)the market is unaware of the interest income being earned on client balances. I say this because I cannot believe they would assign zero value to this. Lets face it, with ever increasing balance client balances, even if interest rates were to halve this year, Alpha would still make well in excess of £50m in interest income. Also, lets not forget that Alpha have hedged $400m via an interested rate swap at 4.14%. This hedge runs up until the back end of CY25.
The picture is similar if we adjust the share price to account for the huge cash on the balance sheet;
2017: £159m / £13m cash / £146m EV = £4.46 share
2018: £206m / £36m cash / £170m EV = £4.65 share
2019: £464m / £38m cash / £426m EV = £11.48 share
2020: £521m / £52m cash / £469m EV = £11.69 share
2021: £895m / £88m cash / £807m EV = £19.70 share
2022: £960m / £114m cash / £846m EV = £20.18 share
2023: £678m / £177m cash/ £501m EV = £11.57 share
So it's effectively back to the same absolute valuation as 2019 (dilution of 16% in the interim period being a small part of the reason). PBT in 2019 was £13.5m vs £115m this year!
Totally agree on bucket vs thimble. IMO the opportunity here has been created by management acting in a way that is totally out of character with modern day stock market short termism
The derating / mis valuation here is most obvious when you look at market cap / book value or an enterprise value based share price.
On market cap / book value, I have the following figures at 31/12;
2017: £159m / £22m = 7.2x
2018: £206m / £47m = 4.4x
2019: £464m / £55m = 8.4x
2020: £521m / £87m = 6x
2021: £895m / £110m = 8.5x
2022: £960m / £140m = 6.9x
2023: £678m / £219m = 3.1x (based Liberum financial estimates at 18/01 + current market cap)
2024: £678m / £300m Liberum forecast = 2.3x
The average BV to market cap ratio from IPO to FY22 was 6.9x, which would equate to a market cap of £1.5b at £218m BV, or £34.70 a share. FY24 rises to £2b / £47 a share the same ratio…
Worth noting that 2018 saw a similar compression, presumably as some of the IPO investors took profits at the £5 level.
Also worth highlighting that WISE had a book value of £740m at it's HY results, so their market cap to book value ratio is well over 10x right now, while a fintech payments star like Adyen trades at ~18x BV. There is absolutely no reason that Alpha should trade at around 3x last years BV and 45% of it's IPO to FY22 average. Even EQLS is trading at ~4x BV, so even on a relative FX peer basis Alpha is significantly cheaper (and absolute ROE is far higher). Crazy.
Ignore my last sentence "Other than the fact Morgan Tillbrook is quite possibly the best CEO".....
I was going to write a little more about my thoughts but I pressed send by mistake and I don't think you can delete or edit posts on here. No time now, so i will revisit later
I've not listened to that interview before so thanks for sharing.
I've come away even more bullish on Alpha after listening. Morgan Tillbrook is one hell of a CEO. Under his stewardship I can only see ALPHA going one way and that is up. The opportunity here is huge. As the great late Charlie Munger once said: ""Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble." Im firmly of the belief now is one of those times.
Other than the fact Morgan Tillbrook is quite possibly the best CEO
Found this interview with the CEO from a few months back, don't think I'd seen it posted anywhere before;
https://m.youtube.com/watch?v=KAio3f8ltHo
Some really interesting bits discussed, especially liked the part about a £1b market cap company not seeming big anymore as it shows the scale of Morgan's ambition.
Re. M&A, I think international acquisitions that can help them rapidly jump into new markets & allow cross selling to a captive client base makes the most sense. I.e. Cobase have 130 clients who could utilise other Alpha services.
This ABS extract from the last annual report is also worth referring back to;
"Whilst we are only scratching the surface of the European market, the service providers we are partnering with are global, and have already expressed a strong desire for us to expand our offering to North America and Asia. These regions are currently outside of our regulatory scope, but with the benefit of the interest tailwind, we have taken the opportunity to begin regulatory applications in the US and Singapore."
Opening offices in both of those jurisdictions to service clients would seem a logical next step & require significant investment
Whichever way you cut it, having a near £200m cash balance which is growing nearly 5% a month is a fairytale for an AIM company...
Nice to have a decent pile to reassure clients and regulators but beyond that, I favour further M&A activity. I suspect there are still bargains about.
Though, I concede, given the painstaking, diligent approach of management this is unlikely to happen so soon after the Cobase buy.