30 Mar 2020 07:00
30 March 2020
Alpha FX Group plc
("Alpha" or "Company" or "the Group")
COVID-19 Trading Update
Alpha FX Group plc (AIM: AFX), an FX risk management and payments specialist servicing corporates and institutions internationally, today provides a trading update in respect of COVID-19.
Trading Update
On 18 March 2020, we announced our full year results for the year ended 31 December 2019 where we reported an increase in revenue of 51% to £35.4m, underlying operating profit up by 47% to £14.7m, an increase of 34% in client numbers to 648, and net assets up 18% to £57.6m.
Since 18 March, the rapid acceleration of COVID-19 and consequential government enforced lockdowns in major economies has resulted in an unprecedented and ongoing slowdown in global trade. Whilst the Group has recorded a strong first quarter, including a record quarter from Alpha Payment Solutions, it is also mindful that the need for clients to transact FX is closely linked to global trading activity. Although it is difficult to forecast in the current environment, we currently anticipate a reduction in FX activity, and in particular forward contracts, as our clients delay or even cancel their commercial activities until their outlook becomes clearer. As a result, at this early stage of the COVID-19 crisis the Board's preliminary view is that revenue and underlying earnings will be broadly close to FY2019 results. Mindful of current macro conditions, we will also be considering whether to increase our bad debt provision.
The acceleration of COVID-19 coupled with the oil price collapse has led to unprecedented falls in the value of certain currencies and accordingly has meant that 223 of our clients saw their forward contracts deviate significantly in fair value. These clients have therefore been required to pay Alpha margin in order to fulfil their contractual obligations with the Group and keep their contracts open. However, one client faced with working capital shortages in its own business, requires more time to settle its outstanding payment obligations of £30.2m1 to the Group. To support this client, we are in the process of negotiating a payment plan, which has created a temporary shortfall in the Group's own cash for use as collateral.
Despite the temporary reduction in collateral to place against new forward contracts, the Group is confident in delivering on its revised expectations for the year and the FX requirements of new and existing clients. The Group has built a strong cash and liquidity position since inception and had a very healthy cash position going into this crisis, with net assets increasing by 18% to £57.6m in FY2019 and significant excess cash which it was yet to deploy. Furthermore, following cancellation of the aforementioned client's contracts, the Group is now also able to unlock £9.2m of ringfenced cash, which was previously allocated as collateral against the client's positions as part of the Group's regular stress testing. Finally, the proportion of Group revenues that came from non-forward products, for which collateral is not required, increased from 15% in 2018 to 30% in 2019, and we expect this trend to continue as our product offering expands, and Alpha Payment Solutions continues to gain traction.
The Group is also working proactively during this period of uncertainty to maximise the amount of collateral it has in the business at any one time. Hedging of non-major currencies (which require higher levels of collateral) will be reduced in this climate, in favour of the Group's major traded currencies (Sterling, Euro, Dollar and Canadian Dollar), which currently make up 86% of Alpha's forward book. Additionally, as discussed further below, our final dividend payment for FY2019 will be cancelled, enabling the Group to apply a further £2m of collateral to our forward book.
The £30.2m owed to Alpha is derived from the Group's largest forward contract client, a global exporter of food produce, previously representing approximately 15% of the Group's forward book. This client held a number of sizeable forward contracts with the Group, primarily selling US Dollars to buy Norwegian Krone ('USDNOK'). In the week commencing 16 March, the Norwegian Krone fell as much as 15.9% against the US Dollar: the largest weekly move in the currency pair's history and nearly three times its previous largest fall of 6.4%, recorded during the 2008 financial crisis. Whilst the client continued to settle their obligations on time as the NOK depreciated over 15% from 1 January to 16 March, the size and speed of a further 15.9% fall caused by the acceleration of COVID-19 in the period following, meant the client subsequently became unable to pay the full margin owed on its forward contracts when due. These contracts were therefore cancelled, leaving £30.2m owed by the client to Alpha.
The client previously had a strong financial track record with Alpha, having settled hundreds of millions of pounds across hundreds of transactions with the Group, and posting significant margin right up until the week of the oil price collapse (prior to the COVID-19 outbreak). However, a sharp rise in demand for its products, predominantly from global supermarket chains who are increasing their inventory to keep up with the current rise in consumer demand, has temporarily reduced the client's available working capital. The Group is in the process of negotiating a settlement agreement with the client to provide it with a payment plan whereby the full amount is repaid in equal weekly increments, from 3 April 2020 until 3 June 2022.
The majority of Alpha's positions are well-balanced across its four major traded currencies. Outside of this, Alpha's next largest position is a Dollar-Polish Zloty exposure split across two separate clients, representing c. 1% of the total forward book. Both clients are of a strong financial standing and have been able to consistently pay margin when required. We are therefore confident in our ability to weather any further volatility, should it arise.
1. Based on exchange rate of: GBPUSD 1.2450, GBPNOK 13.06
Outlook
At this early stage of the COVID-19 crisis the Board's preliminary view is that revenue and underlying earnings will be broadly close to FY2019 results.
These are challenging and unprecedented times that few could have anticipated but Alpha went into this global crisis with a strong team, highly differentiated service offering, robust technology systems and a conservative liquidity strategy, all of which have stood us in good stead in our performance to date. The Group remains well capitalised, cash rich and debt free, and has made moves into new products and markets, including Alpha Payment Solutions and our sales offices in both Canada and Amsterdam. These continue to represent substantial opportunities which the Group will continue to invest in. Our financial and operational strength has allowed us to withstand the headwinds of COVID-19, going a long way to prove that we are a long-term sustainable business and can continue with our planned strategy. With revenues in line with expectations in Q1 and our team remaining fully operational in the current lockdown, we continue to support our clients' FX needs effectively. We therefore remain highly excited about Alpha's future and our ability to deliver on our long-term ambitions.
Dividend
As referred to above, to maximise the size of its forward book and in doing so capitalise on opportunities that the Group is continuing to see across its markets, the Board has decided to cancel payment of the 5.4 pence per share annual dividend for 2019 which was due to be paid on 13 May 2020. This prudent course of action, which the Board believes is in the best interests of the Group and its shareholders, will provide £2 million of cash to be applied to the level of collateral for the Group's forward book. The Board recognises the importance of dividends to shareholders and intends to resume payment as soon as it is appropriate to do so.
Employee share schemes
The Group reported in its full year results that it would issue 535,300 ordinary shares under the B Share Growth Scheme and 287,573 ordinary shares under the C Share Growth Scheme by 31 March 2020. The Board does not consider it appropriate to issue new ordinary shares under these share schemes at this time and will defer their admission until further notice.
In conjunction with the Company's IPO, on 3 April 2017, Lisa Gordon entered into an Unapproved Option Agreement with the Company pursuant to which, Lisa Gordon was granted an option to purchase 57,397 ordinary shares in the Company at £0.002 per new ordinary share at any time up until the third anniversary of the IPO. The Remuneration Committee (comprising Clive Kahn and Matthew Knowles) have determined that it is not appropriate to have that option exercised at the current time. Accordingly, the Group has agreed with Lisa Gordon to extend the exercise period until 3 April 2021, provided the option is not exercised prior to 3 October 2020.
Enquiries:
Alpha FX Group plc via Alma PR
Morgan Tillbrook, Founder and CEO
Tim Kidd, CFO
Henry Lisney, COO
Liberum Capital Limited (Nominated Adviser and Sole Broker) Tel: +44 (0) 20 3100 2000
Neil Patel
Richard Bootle
Kane Collings
Alma PR (Financial Public Relations) Tel: 07780 901979
Josh Royston
Helena Bogle
Rebecca Sanders - Hewett
Market Abuse Regulation
This announcement is released by Alpha FX Group plc and contains inside information for the purposes of the Market Abuse Regulation (EU) 596/2014 ("MAR") and is disclosed in accordance with the Company's obligations under Article 17 of MAR. The person who arranged for the release of this announcement on behalf of Alpha FX Group plc was Tim Kidd, Chief Financial Officer.
Notes to Editors
Alpha is an FX risk management and payments specialist focused on helping organisations manage their currency exposures more effectively. The Group's primary client base consists of corporates and institutions that have a requirement to convert currency for a commercial purpose, such as buying or selling goods and services overseas, repatriating profits, or expatriating payroll. Since it was incorporated in 2010, Alpha FX has been able to build and retain a high-quality client base that includes a number of highly respected household brands.