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I've just run a reverse DCF on Alpha projecting cash flows for the next 8 years.
My assumptions are as follows:
I have assumed that over the course of the next 8 years Alpha will produce £400m in free cash flow = £50m per year average. I am basically implying Alpha will not grow at all in this time. (To put this into context, Alpha have done c. £115m pre tax net in FY23. It remains to be seen how much free cash this produces but its certainly going to be well north of £50m!)
Terminal Growth rate of 1%
I have applied a discount rate of 9% to these cash flows.
Based on these assumptions intrinsic value comes in at £16.58. The current share price is about £16.50 so this tells us is the market is pricing in ZERO GROWTH for Alpha from here on. Simply put, imo the market is dead wrong here. This stock is severely mispriced. I've bought heavily here and will continue to do so when funds allow.
Alpha's conservative approach of not including interest income in their underlying earnings figures is hurting the share price. As @ShearClass points out, whilst this is very commendable most companies do not report like this. This subject is covered by Liberum in their note today.
Liberum compare CY24 forecasts - Alpha vs Wise (who unlike Alpha include interest income in their underlying EPS) on an apples-to-apples basis.
On an EV/EBITDA basis WISE trades on a 3x premium to Alpha. On a PE comparison its 4x
This extract from the Liberum note expands on this point:
"The valuation delta between Alpha and Wise is thus hard to justify, in our view. Moreover, in Alpha’s case at least, there is a natural hedge: high rates benefit interest income, while lower rates benefit Alternative Banking Solutions. We believe this asymmetric valuation of interest income is a material risk to Wise in 2024".
A move to the main market is due this year. Surely more eyes on this value disconnect will close the gap. Alpha is criminally cheap down here. Ive added again today to make this my largest holding
Alpha another fantastic trading update yet the share price is down.
Margins have remained steady which is impressive considering they are spending heavily now for future growth.
PBT up 10% yoy on an underlying basis - even in this tough environment the company is growing well. When the environment improves growth rates of > 25% will resume here.
In the meantime the company is making cash hand over fist as the client balances of their alternative banking division swell. As a result PBT on the year is up 140% to £115m. Cash on the balance sheet up by over £60m to c. £177m
Seems like the market is completely ignoring the cash from interest on these client balances.
Trailing PE for FY23 here now under 8. Its completely absurd how cheap this growth stock is.
Hi Koolhead.
Initial free cash flow of £50m
5% growth rate in year's 1 -10
Discount rate 10%
Terminal rate 1%
Fair Value = £17.84
I'd like to point out that a 5% growth rate is very low and pretty unrealistic when you take into account that ALPHA have 5yr CAGR of c.50%
Financial modelling is notoriously difficult but I have completed a DCF on a number of scenarios to determine what a fair value on the Alpha share price should be.
As we are all aware, the current high interest environment means ALPHA will make in excess of £70m in free cash flow this year. In all scenarios I have used a very conservative discount rate of 10% and terminal rate of 1%. Based on an initial FCF of £70m. Here are the results:
Growth rate (years 1-10) of 5%. Fair Value = £24.39
Growth rate (years 1-10) of 10%. Fair Value = £34.83
Growth rate (years 1-10) of 15%. Fair Value = £49.86
If you go ultra conservative by assuming an initial free cash flow of £50m to reflect the slim possibility of interest rates returning back to less than 1% in the next 12-18 months. Even then, if you use a modest growth rate of 10%, I'm still getting a fair value of £24.88 per share.
However you wish to dice it, using DCF, at £16.60, Alpha shares are very undervalued.
I have added to my position today
The science is very sound but the only thing left causing any anxiety is around the issue of funding. Don’t get me wrong, Avacta will get the funding, but the market is nervous about how this will look and at what cost.
It might be an unpopular opinion but I’d be quite happy if Avacta did an equity raise for £50-70m early in the new year. Despite the horrendous market conditions, I think a raise price of 130p-160p will be easily achievable once the P1a data is released.
Yes, this will cause some dilution which nobody wants, but 15-20% dilution here is not a great deal in the grand scheme of things, especially if this cash enables us to: complete the AVA6000 P2 trial and AVA3996 P1 trial without the need of a partner. Its my view that a little dilution upfront will be more advantageous to us shareholders in the long run, rather the dilution coming later down the line in the form of lower profits due to licencing larger parts of our lead two assets.
Graham and Paul at Stockopedia both very bearish on Boom.
Here is what Graham had to say today:
Audioboom is one of the worst offenders when it comes to emphasising adjusted EBITDA over real profits. Its H1 results (reviewed by Paul in July) showed adj. EBITDA of $300k, and then share-based payments (not included in adj. EBITDA) of $1.4 million! All told, the operating loss finished at $10.6m, including a provision for an onerous contract.
Here are the key points from today’s Q3 update to the end of September:
Total year-to-date revenue (nine months) down 20% to $45.8m, “reflecting the loss of the Morbid podcast which left the network in May 2022 and a weak advertising market during this period”.
“Strong start to Q4 2024 with anticipated revenue of at least US $19 million…”
And now for profitability:
“Total adjusted EBITDA loss for the nine months to 30 September 2023 of US $1.7 million, which includes full payment of all creator minimum guarantees signed to the Audioboom network before the advertising market downturn”
“Anticipated return to adjusted EBITDA profit in Q4 2023 through acceleration in revenue and consequently reduced exposure to creator contractual minimum guarantee obligations”
When there’s an adjusted EBITDA loss, I find it very hard not to take a negative stance - this is the company putting its best foot forward, even ignoring a large chunk of employee pay in the form of share options, and it’s still loss-making?
In fairness to Audioboom, the advertising market has been very rough. But then investors should ask themselves: why invest in a business that is so exposed to the winds of fortune?
Buying up content and monetising it with ads is no easy task - large media organisations can usually pull it off. But would I want to bet on a small media company being able to do it consistently? Not really, no.
When it comes to the podcasting niche in which Audioboom specialises, this is an unproven space when it comes to third parties investing in them and monetising them. I agree with Paul’s view that ads in podcasts are off-putting. I don’t think there is any easy solution to this.
Cash balance - the Audioboom cash balance drops to $3m (June 2023: $5.3m). This is one company I would certainly not want to own if its cash balance falls into the red.
CEO comment: he says “I am confident about our prospects for 2024 and I am pleased to maintain our expectations for record revenue performance next year."
Estimates: the RNS and the CEO comment do not spell out the fact that revenue and profit expectations for 2023 must be reduced. A note from Cavendish this morning helpfully does this job for us: revenue forecast down 7% to $65m, and the new adjusted EBITDA forecast for 2023 is a loss of $1.5m (previously a profit of $0.6m).
The estimates for 2024, apart from the company’s cash balance, are indeed unchanged.
Graham’s view
It’s easy for me to say
Nice article from The Lancet for those who wish to understand more about ADCs
https://www.thelancet.com/journals/eclinm/article/PIIS2589-5370(23)00290-0/fulltext
For those that haven’t read “for blood and money” and to add a bit more colour to @jive-turkey’s brilliant post. What’s arguably even more astonishing than the story of ibrutinib (acquired by AbbVie for $21B) is the story of Calquence, the BTK inhibitor purchased buy Astra Zeneca in 2015 for $6.4B.
Two employee’s who were instrumental in the development of ibrutinib were fired by the trigger-happy CEO at Pharmacyclics part way through the phase 1B/2 trial in 2012. Rather than feeling sorry for themselves, a few weeks later, with the help of a wealthy bio tech investor, they set up their own company - Acerta. Within a few months they had acquired their own BTK inhibitor from Merk for $1,000. Starting out in a make shift lab in the garage of one of the founders’ homes, they got to work on their newly acquired molecule. Working at breakneck speed, they had entered the clinic in a phase 1 trial by the end of 2013.
During the course of the phase 1 trial, they were granted FDA accelerated approval for mantel cell lymphoma which enabled them to significantly reduce the cost of development and time to market.
Owing to the exceptional trial data, in Q4 2015 Astra Zeneca had seen enough and agreed to buy the company for $7 billion (later reduced to $6.4B due to patent litigation) This was despite the fact that Calquence still had to undergo a phase 3 study.
Astra Zeneca’s bet paid off and the drug was approved by the FDA in Oct 2017 (a little under 4 years after entering the clinic) for use against mantel cell lymphoma. Calquence has gone on to be a blockbuster drug with sales of over £2B per annum and is taking significant market share from ibrutinib.
Not only is this a brilliant story but it is also very relevant to Avacta holders as the strategy and pathway to approval has many similarities to what we are witnessing with AVA6000. I would highly recommend you read the book.
This RNS took me by surprise although I really like the look of this new acquisition. Cobase looks like a fantastic little business that has built a really innovative software banking solution. The 50% client growth in the last 12 months suggests demand is certainly there for the product. With 100+ corporates using the Cobase banking software I would imagine Alphas slick sales team should be able to convert a big chunk of them into buying services from Alpha which will make the £8m (plus earn out) acquisition cost an absolute bargain.
If Morgan Tillbrook thinks buying Cobase is a good move then I suspect he will most likely be proved right like most of his decisions. Exciting times !
Check out the Cobase website. There is a lovely video explainer of their software solution https://www.cobase.com
@ShearClass I think its unlikely the market doesn't give ALPH any credit for the >£70m they will earn in interest in this year. Whilst its frustrating they don't declare this in the headline revenue number it will still there in black and white in the P & L under "other operating income". imo Institutions running the slide rule over ALPH are going to identify this and rightly conclude that interest earned is very much related to the principle activities of the company. Any fund manager or serious analyst is going to identify the discrepancy between the reporting of interest income Vs WISE and adjust accordingly. The appointment of a new broker will get more eyes on this share plus the move to the FTSE 250 next year will really help. The average PI may not notice this discrepancy, but the re-rating of this share is most likely to come from institutional buying. In the great scheme of things I'm pretty relaxed about it especially considering I'm in ALPH for investment purposes and not a quick flip.
20% growth is very good in current market conditions but as @ShearClass points out not enough to push the shares higher. The £33m in interest is slightly higher than I was expecting so a pleasant surprise there. Brokers target of £120m revenues (excluding interest income) looks like it will be achieved especially considering June was a record month for the company. My forecast of c £100m PAT looks very doable assuming rates don't come down much between now and year end. All in all I'm very pleased with the update. The value here is undeniable. Patience will pay off in spades.
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!
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.
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.
Agreed @ ShearClass. The Capex you mention has to be taken into context with the speed in which TBLD are buying in and developing IP. One could argue the TBLD are trying to grow a little too quickly. I think a period of consolidation is needed especially as the macro backdrop looks very uncertain in the near future.
Despite this, which ever way yo dice it, from where I'm sitting at £100m market cap the shares are very attractively priced.