Charles Jillings, CEO of Utilico, energized by strong economic momentum across Latin America. Watch the video here.
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Definitely not against the crowd, as per the IC link shared a few days ago Alpha are by far the top 'small cap' pick of UK fund managers & have grown in popularity this year; https://www.investorschronicle.co.uk/tips-ideas/2020/11/18/fund-managers-favourite-uk-smaller-companies-shares/
It's just very under the radar for now, almost certainly because the company want it that way. As I've said before, they only have 1 analyst covering them! I think you'd struggle to find a similar situation in any other global market. Certainly I think the combination of a founder CEO, impeccable equity growth story & potential for the future makes it unique. But yet, patience required for the time being / a chance to accumulate.
It looks like we're all going against the crowd. Some IIs are forced sellers but after a while we should be rewarded handsomely for being patient.
100% agree with your reasoning there @ShearClass. Morgan Tillbrook is in my opinion the best CEO on the UK public markets so if anyone can lead ALPH into a £10bn market cap company then he can. As you say, its going to be quite a ride!
Cheers @golfnut59, yours is an excellent post too. It's a very interesting company and I think it helps to share thoughts - more than anything to confirm you aren't going crazy re. valuations...
Using the info provided by Alpha I've tried to estimate the proportion of client cash as a % of an average alternative investment portfolio. The starting point is the Preqin research quoted in their annual report;
https://www.preqin.com/insights/research/reports/alternatives-in-2023/ceo-foreword
"Preqin tracks 160,000 funds globally and we estimate that each fund will have on average ten assets, each requiring accounts"
+
"We expect AUM to rise from $13.7tn – as of year-end 2021 – to $23.3tn in 2027, a compound annual growth rate increase of 9.3%."
At the end of 2022 Alpha had 4200 accounts live, so applying that to the estimated 1.6m global market size, had a market share of just 0.26%.
The TAM at the end of 2022 based on Preqin's 9.3% growth rate would have been $14.9t, so we can estimate that the total value of client accounts utilising Alpha's solutions was $14.9t *0.0026 = $39.3b, which at an exchange rate of USD 1.2 is £32.7b. Therefore, if client cash balances averaged £1.6b in Q422, you can calculate that the proportion of cash held per account was ~4.9%, which feels about right.
The industry is absolutely massive. If we assume bank accounts grow in line with AUM at 9.3%, then the ~1.6m at the end of FY22 will become ~2.5m by the end of 2027. If Alpha can grow their market share to 1.5% by that point, they would have 37500 accounts under management (they are targeting 8400 at the end of this year, so that definitely feels possible), with ~$350b/£290b of AUM.
If just 2% of that is held as cash then average client balances would be £5.8b, which at a blended interest rate of 3% gives ~£175m per annum interest income.
The crazy thing is none of the above figures seem outlandish when you consider that average client balances in Q421 were £800m, so they have grown by £1.1b in the last 5 quarters. If that average quarterly cadence of £220m is maintained, then in 18 quarters time at the end of 2027, average client cash balances will be £5.86b.
Of course that leave loads of upside. Indeed, when you consider WISE customers held cash of £11.5b at the end of Q2 it makes the numbers above seem very achievable , especially with very significant resources to throw behind new customer acquisition & new tech development.
IF they can deliver the above then I don't see why the market cap can't grow to where WISE trades at today (£10b). It's going to be quite a ride I think. All the above is NOT investment advice - do your own research!
Some great posts from you @ShearClass. So in H1 they have earned £29.25m in interest income.
Compare this to 2022 where they earned £9m in interest income for the year.
Other than the significant amounts of cash earned from the interest income, as ShearClass points out, these figures show us that ALPH have added £300m in client balances in Q2. That is a 19% increase in growth in one quarter! Something tells me things are going rather well at ALPH.
Lets assume modest growth in the final two quarters of the year:
Q3 blended average balance £2Bn @ 4% = £20m
Q4 blended average balance £2.1Bn @ 4% = £21m
Based on these projections ALPH will earn £70.25m in interest income
Now lets look at the last broker note from Jan 23. They had the following: Revenues of £120m & income from client balances ("other operating income") £24m. Added together that gives us a total income of £144m. The forecast PBT from this was £71m. Excluding the £24m interest income we are left with £47m of PBT.
Its pretty clear to me that due to the 19% growth in Q2 vs Q1 that the brokers forecast of £47m PBT in earnings (not including interest from client funds) will likely prove way off the mark. If conservatively we say this figure is going to be £60m that means ALPH should earn c. £130m PBT in 2023 (60m + 70m from interest income)
Assuming ALPH pay the full corporation tax rate of 25%, that leaves a PAT of c. £100m. Current market cap of ALPH is £900m so that's a PE ratio of 9 which is ridiculously cheap for a company growing at an extraordinarily fast rate.
Wise released their Q1 trading update this morning, the below two pieces of info are relevant;
- “Wise account balances grew to £11.5bn by the end of the quarter. On these balances we earned a gross interest income yield of 3.4% in Q1 FY24 (Q4 FY23: 2.8%) and the amount we were able to return to Wise account customers increased to 0.9% (Q4 FY23: 0.6%).
- Outlook for FY24 unchanged: Income growth of 28-33%, and adjusted EBITDA margin remaining elevated (vs. our medium term guidance of at or above 20%) as a result of higher levels of interest income net of customer benefits.”
I believe the emphasis on ‘elevated’ EBITDA vs medium term guidance is a far more balanced approach to treating interest income & hope Alpha adjust their approach for FY24 to match Wise.
Zero idea why oh earth you’d want to stop the dividend though, at 14p it cost £6m and is covered 3x by Q2 interest income alone! For IPO investors who are lucky enough to have held from 196p it’s a yield of 7%. Buybacks are a waste of capital when they are issuing incentive options. They are doing everything right, patience is definitely required though until the market values it fairly.
It won’t become a takeover target if they start to include interest income as regular earnings rather than other operating income. It made sense to separate them last October due to the rapid increase in rates during 2022, but the outlook now is wholly different. WISE have significantly re rated due to their new secondary revenue stream & Alpha need to get through the £1b barrier. A potential current year forward PE of around 10 is laughable.
It’s even cheaper on an EV/EBITDA basis. Year end net cash was forecast to be £168m with £45m interest income. It appears we can add another £20m to that forecast. So based on the market cap at £21, we’re trading at an EV of around £720m. EBITDA will be well over £100m…
Agree on the US, their market has lost the plot & it’s incredibly difficult to hold anything due to the lack of fundamentals. Not worth bothering with.
Thanks I found it via a search of their website the other day. I dont want alpha to be a takeover target,the CEO is still a young amn and doesnt want to cash in, and i dont think the investors want to sell it. this is one of the few stocks imo that could become a 50 bagger stock. all it needs is a rerate up on its p/e ratio which happens in 50 bagger stocks, then once it matures in many years time it buys its shares back reducing the float. The only thing I want alpha to do is stop the dividend, as if it takes all its earnings and ploughs it back into business it can expand even faster.
I have decided to move away from US stocks as they are still too open to manipulation and hype , and rarely trade on fundamentals.
I only want good stocks, that are debt free, still smallish and early in their growth with a large total addressable market and undiscovered by the mass funds , such as alpha is.
Ah, it's been moved to a new page. I can see why you were excited though;
https://www.alphagroup.com/investors/financial-information/#p-10877
£1.9b average client balances is absolutely stunning, that's the key figure going forwards as it gives an indication of how fast the ABS arm is scaling & is obviously the base for the interest income. To add £300m in Q2 is way beyond my expectations & already above the top end of Liberum's matrix for other operating income to YE23, released at the time of the full year results in March (3.1% was the peak of blended interest rates, £1.8b client balances)
So yes, ~£18m income for Q2 to add to the £11.2m in Q1 and now up to an annualised level of £72.2m. Earnings forecasts get quite crazy vs the market cap if they keep adding £300m per quarter to the average client balance figure, especially as I expect Q3 blended rates to keep increasing towards 4.5% and fully expect further hedges to have been locked in, to add to the ~£530m hedged at 4.1% for the next 2 years.
It will be fascinating to see what they do with the cash, it gives them some serious firepower.
@rango1, typical, I checked Friday morning and the Q2 figures weren't there! I note the whole section has been taken down today... can you confirm what the blended rate & average client balance figures were?
I agree in any sensible market shares would be trading at £30-35, the fact they were at current levels almost 2 years ago is crazy. They just need to keep doing what they are doing and it'll be recognised sooner or later - no chance a business of this quality should be trading at ~9x FCF / an 11% yield...If I had £1b I'd be tempted to make a takeover offer ;)
Agreed, it was also commented that we may be close the limit in market cap for AIM, it would be great if more trackers could own us more institutes , when we go to ftse 250 that will happen, prob early 2024. If this was listed in the USA only the equivalent business would prob be on a price to sales of 15 and above, an easy £2 billion cap over there. AS the americans really over buy and buy.
Long term , we need more volume from abroad, that will happen. what sort of sale growth is very high growth??, we are around 25%, but our earnings growth are higher rate. I have been reading up, sales growth means customers really want your product, you are marketing it well, and you are taking business away from competitors, earnings growth means you are very efficient with your capital.
could alpha reduce the number of staff? could AI do some of the dealing, to avoid staff costs?
could they reduce buildings costs, as it must be high to rent a London premises?
I think their banking business will take off , much more than their FX business!!
A mention of AI being used and watch the market cap shoot up as well. as AI is very popular.
At the moment I have money is some US stocks awaiting some big short squeezes, once that happens I will plough more back into alpha, basically cos I will feel safer in the fact it wont drop 30% in pone day or go up 50% in one day as many US stocks do, if you dont time the trade right over there you can be in trouble.
The link is the same as Shearclass posted on the 21st June.
I expect the core business to accelerate over the next few years - as they’ve intimated by them bringing forward their 2024/25 investments into this year . Then there’s ftse 250 to come into play as well next year. As regards interest income -that could be circa £130m next year alone! Am I alone in thinking the share price should be nearer £35 rather than the £20 it is now.
Yes, the interest alpha will earn will be fantastic over the next few years especially over the next 24 months, as the CEO said the interest we earn is the cherry on the sundae, look at our underlying money we make from our services, our fees. of course interest rates are transitory ( so we have been told by bank of England governor) and indeed ( the same in the USA).
Will the stock market be considering that in the valuation of alpha? I am a big fan of the company and hope investors will consider the underlying business as well as the money earned from interest. what if interest rates stayhigh for longer ? will investors leave the stock market and go for risk free treasuries instead? despite companies like alpha earning lots form the high interest enviornment?
Could you post a link to that after hours update from alpha, I cant seem to find it, then i can see if the calculations are correct.
As they’ve now released the Q2 blended rate after market hours today then surely they must release a TU first thing on Monday morning because this is price sensitive info. I’ll certainly be buying another shed load on Monday on top of my already excessive holding.
Could someone tell me the errors in my logic of £2 eps. If interest income is circa £80m plus operating profits of circa £45m gives total profits of circa £125m. Apply tax at 25% gives PAT of £94m. Divide by number of shares say 45m gives Eps of £2 plus.
Just seen Q2 interest income figures provided. Looks like interest income in H1 will be circa £29m alone. Hence the year end forecast of £43 m interest income will be smashed. Likely to end up circa £ 80m for the year. With these type of figures EPS for the year could be near £2 !!!!
Thanks for reply, I have also been trading US stocks lately as the volume over there is crazy. You see stocks like carvana go up 600% on a short squeeze or tesla or nvidia rise with anything with AI in it,. over last 5 months. the bull market is still going in the US.I understand alpha is a very good company and a good hedge, but its timescale for when we will see a large jump in stock price.
one question what is more important, sales increases or profit increases??, as in the US its all about sales, they dont care if a company makes no profits, ( it means it also pays no tax or dividends) and puts all its money into growing market share.
alpha has nice profit margins 37%, but its growing sales at around 25%, is 25% high enough?, do you think they should cut the div and use that money to grow more sales, and should they stock the stock compensation, as that dilutes us slightly, could we get sales growth of 50% like nvidia or tesla? which runs on P/E of over 100%, Alpha is priced nicely, will it ever see p/e ratios of over 100 , like I see in American stocks.
In this current market, range bound feels like a win. Alpha is now my biggest position by a distance. I will quite happily add more if it dips below £20. If the HY results are anywhere near as good as we all think they are going to be then the market is going to get a shock. The stock will look criminally cheap at current prices, even in these horrendous market conditions. For this reason I believe we will see decent re-rate at the back end of the summer.
Odd how the link has 2020 on it , but when you open it it is dated July 3rd 2023
Yes it is frustrating, knowing that this is one of the fundamental best stocks on AIM, you see other junk stocks on AIM having hundreds of trades a day and you wonder why Alpha has such few trades, although the ones that go though can be very large indeed. I look at the US stocks and so much loss making junk over there, but these get huge volume on the slightest bit of news. or some have huge short squeezes.
I also see Alpha has moved to the top pick of UK small cap stock by UK fund managers.
https://www.investorschronicle.co.uk/tips-ideas/2020/11/18/fund-managers-favourite-uk-smaller-companies-shares/
will we be rangebound until we move off AIM? or will institutes keep trading between themselves? eventually increasing the price whilst still on AIM.
It is good to know we have few retail, as that is prob why we dont get much chat here.
Quarterly figures have been updated on the website & the main changes in Q2 were;
Sellers;
Liontrust shares - 375k shares
Eqi Stockbrokers - 308k shares
Martin Currie - 211k shares
Kabouter - 165k shares
River & Mercantile - 156k shares
Chelverton - 84k shares
Premier Miton - 46k shares
Aegon - 42k shares
Total outflow from top 20 shareholder list; ~1.4m shares
Buyers;
Abrdn - 654k shares
JP Morgan - 303k shares
Jupiter - 223k shares
Fidelity - 130k shares
Baillie Gifford - 50k shares
Total buys from top 20 shareholder list ~1.37m
New register addition - Berenberg - 455k shares / 1.08%
So it's not hard to see why the holding pattern continues! As long as Liontrust & other under pressure UK II's like River & Mercantile, Chelverton etc are providing supply to much larger beasts like JPM & Abrdn then shares will remain rangebound.
It's notable that no new II's have appeared on the register in the 9 months / 4 quarters I've tracked it. This is almost certainly due to market conditions & the fact shares aren't traded on SETS so are very illiquid / hard to buy.
Notable absentees from the cap table that are commonly present in other FTSE 350 stocks are the likes of Schroders, Norges Bank, Aviva, L&G, Invesco, Vanguard, Janus Henderson, Standard Life, AXA, JO Hambro, Investec, Ameriprise, Lazard & Rathbone. Of course there are also a multitude of US & international funds who will very likely avoid AIM shares or be unable to buy at present.
The final point is that PI's between HL & interactive investor still own only 2.2% of shares - I suspect this is about the lowest ratio on AIM - a very good sign IMO.
As per the website, interest income figures for Q2 are to be published on the w/c 10th July, presumably alongside a trading update.
It'll certainly be interesting to see how the dynamics have developed in Q2, their first interest rate swap for £205m at 4.1% commenced in June, with the second larger one for $400m commencing in August at 4.14%. With rates still showing no sign of peaking & a return to the 2% inflation target not expected until mid 2025, you'd have to wonder at what stage the market will start to price in the value to Alpha of global rates remaining above 3% for the rest of the decade, in line with the pre 2008 world.
Ps. If you model client cash balances as averaging £1.6b this year & increasing by £200m each year out to 2030, ending at £3b, a 4% average rate for 2023, 24& 25 and then a 3% average rate for the remainder and apply an 8% discount rate to account for the time value of money, the present value of those cash flow is ~£450m (absolute value ~£600m), so worth over £10 a share. Not bad for a current AIM company!
Of course you could then go further & estimate the incremental ROCE driven by these cash flows at the historic Alpha average of ~24%, which would deliver a huge uplift in future year forecasts, but we'll leave that to a future capital markets day, assuming one would be tied to drumming up interest ahead of a 250 listing ;)
Aye, lots of lumpy trades going through.
And our sole analyst's forecasts (from Mar 23):
Rev: 119.8 (23), 138 (24)
Interest income: 45 (23), 45(24)
Fair to say, somewhat conservative...