AFX.L Regulatory News (AFX)

5 September 2022

Alpha FX Group plc

("Alpha", the "Company" or the "Group")

Interim Report

Alpha FX Group plc (AIM:AFX), a high-tech, high-touch provider of FX risk management, accounts and payments solutions to corporates and institutions internationally, today announces its Unaudited Interim Report for the six months ended 30 June 2022.

Financial Highlights

Operational Highlights

Outlook

We delivered H1 earnings in line with expectations, including unprecedented levels of investment focused on extending our long-term growth runway. As we enter the second half, trading remains strong across both FX Risk Management and Alternative Banking Solutions. The Board therefore intends to continue investing for growth in H2, and expects to comfortably meet management expectations on revenue and profit for FY22.Morgan Tillbrook, Chief Executive Officer of Alpha FX commented:

"It is a privilege to report on another strong set of results, and I would like to thank our team for all their hard work in delivering this performance. Although much of the world is moving into a challenging macro environment, I have never felt more confident about the potential of the business and our long-term growth prospects. Our highly decentralised structure has helped us to evolve our business model and strategy in a way that is delivering significant competitive advantage and momentum whilst giving us the clarity and confidence to increase the rate at which we are investing for long-term growth. I am therefore confident we are in a strong position to sustain our company's growth and returns in the long term, whilst continuing to deliver strong performance in the short term."

Notes to Editors

Alpha is a high-tech, high-touch provider of enhanced financial solutions dedicated to corporates and institutions operating internationally. Working with clients across 50+ countries, we blend intelligent human capabilities with new technologies to solve complex problems across three key areas: FX risk management, global accounts and mass payments.

Key to our success is our team - nearly 300 people based across seven global offices, brought together by a high-performance culture and a partnership structure that empowers them to act as owners of our business.

Despite being an established business listed on the London Stock Exchange, we remain relentlessly focused on maintaining the same level of operational agility and client focus we had when we first started in 2009. This dynamic, combined with the passion of our people, have enabled us to make a substantial and enduring difference to our clients, and deliver a growth story to match.

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.

Chief Executive's Statement

Overview

In the first half of 2022, we have continued to grow our client numbers, invest in our people, and see the benefits of our decentralisation. We now have 288 people based across our two divisions, underpinned by independent leadership, clearly defined strategies, and a high-performance culture. As CEO, it is an absolute privilege to be in a position where these divisions are executing so well, and I take great pleasure in seeing our leadership teams honing their strategy-setting and execution capabilities. This provides me with the bandwidth to better utilise my time to support both divisions strategically and explore exciting new growth opportunities for the Group.

In terms of overall numbers - revenue grew 35% in the period from £34.2m in H1 2021 to £46.1m; deferred revenue related to Alternative Banking Solutions increased from £2.2m as at 31 Dec 2021 to over £4m as at 30 June 2022; and the Group was profitable across both divisions, with underlying profit before tax of £18.0m and a margin of 39%. The latter was despite a significant increase in investment in our cost base across the board: 74 new people were hired during the period, more than in the whole of 2021; long-term leases were agreed on three new offices, each with significant capacity for growth; our marketing strategy was launched, with a new website and brand refresh imminent; travel expenses relating to clients increased back to pre-COVID levels; and significant progress was made on our regulatory applications in Australia and Luxembourg.

Despite the acceleration in investment, at the end of June we still had £97.5m of adjusted net cash, providing a substantial platform for growth. With our people, infrastructure and capabilities continuing to go from strength to strength, and our strategic investments proving themselves, we are strongly positioned to deliver on the opportunities in front of us.

Business overview

FX Risk Management[5]

We enjoyed strong trading across our FX Risk Management division, in both our London office and overseas offices. Overall, our client base grew to 975 and delivered 31% revenue growth against H1 2021, to £32.3m. Average revenue per client also increased, reflecting our ability to increase wallet share and work with increasingly larger clients as our business matures.

Our strong performance reflects our differentiated service offering and the continued success of our investments in people, processes and technology. The opportunity to maintain sustainable long-term growth in this division has never felt stronger. Underpinning this confidence is the breadth and depth of talent within the division's Front and Back Office teams. Front Office headcount increased from 74 to 97 in the period, but even without new hires, there remains considerable capacity for growth within our existing team, the majority of which are in the earlier stages of their learning curve. This means that the hires we make today are not crucial to delivering on short-term targets but instead represent investment for the longer term, allowing us to strengthen our future growth prospects and extend our runway.

In May we launched our brand-new client platform for FX Risk Management. Prior to decentralisation, our technology spend and focus had predominantly been in Alternative Banking Solutions. However, with decentralisation complete and our online platform built upon an entirely new tech stack, we are excited to be ushering in a new era for technological innovation within FX Risk Management. Our new platform already benefits from an entirely new client interface and greater functionality, and we are looking forward to building on this as part of an ongoing roadmap of insight-led product development, designed to deepen our differentiation and add further value to clients.

Further progress has also been made in scaling our selling standards globally. These standards ensure our teams operate with high levels of integrity and possess the knowledge and skills to deliver the best possible solutions to clients. Within our industry, banks and foreign exchange brokers continue to heavily focus on market commentary, economic updates and currency market predictions, all of which tap into people's emotions and encourage businesses to purchase currency based on how favourable the current exchange rate appears against future expectations. This however leads businesses to hedge disproportionately, either out of desire for gains - i.e. hedging excessively when the exchange rate appears favourable - or out of fear of realising losses - i.e. not hedging at all when an exchange rate appears unfavourable, in the hope that it will "bounce back". Ultimately, this pattern of hedging creates concentration risks and leaves businesses vulnerable to exchange rate volatility. Changing this mindset however can be difficult and will often require us to challenge clients on what they want, in order to provide them with what they need. Whilst this often can be a much harder sell, we also know it is the right one, and by looking after the long-term interests of our clients, we will ultimately ensure more sustainable long-term growth of our own.

FXRM Overseas Offices

Our London office serves as an incubator for our strong culture and talent, developing individuals, some of whom, go on to establish new offices overseas. Our Milan office is testament to this: launched in March 2022 by three experienced existing employees, the business has grown quickly under their stewardship and is already profitable. Our more established Amsterdam office also delivered very strong trading in H1, with revenues more than trebling.

Canada grew revenue in the half from £2.3m to £2.5m, and profits were marginally down. Whilst this was partly due to investment in our cost base, I believe it is important to be candid about the fact that sales growth in Canada has been lower than we originally expected.

We now anticipate a small reduction in revenue and profit for Canada in H2 due to a shortage of senior staff in the office which has been further exacerbated by the office's top salesperson moving to our new operation in Australia, and one of the founding members moving back to the UK for family reasons. Our focus is now on upskilling and building out the existing team in order to restore the senior bandwidth needed to return to sustainable growth in 2023 and beyond. Moving forward we will also be conducting more regular and detailed reviews of skills resource in each office to ensure we can pre-empt potential growing pains like this far in advance. Steps have already been taken in this regard and we are therefore confident this is not a trend that will repeat in other overseas offices - all of which are performing ahead of expectations and have appropriate weightings of junior and senior staff to support pipeline growth.

We continue to focus on growing in new territories, with our office in Australia expected to launch later this year, upon receipt of regulatory approval. Additionally, we are also pleased to be making preparations to launch a Spanish office in Q1 of 2023. Much like our Italian office, our Spanish office will see four existing employees from London move to Madrid to lead a team, each with strong track records of success in penetrating the Spanish market when operating from our UK base. Establishing a presence in Madrid not only provides greater prospects within this already encouraging marketplace, but will also enable the team to attract high-quality local talent to support their expansion.

Alternative Banking Solutions

We have seen excellent trading in our global accounts solution for the alternative investment sector. This division is serviced by a specialist team, backed by growing investment in technology, intelligent processes and strong relationships with high-quality banking partners. The Alternative Banking Solutions technology platform had a Beta launch in Q4 2020 but was formally launched in September 2021.

Traditional offerings (bank or fintech) are typically mass-market in nature and built to service either corporate or retail clients. They are therefore not designed to efficiently cater for the complexity, nuances and rigid time pressures that characterise investment structures. The result is a service that is time-consuming, resource-intensive and expensive, both for the solution providers but also the clients they serve. Alpha provides clients operating in the alternative investment sector with a truly purpose-built platform, underpinned by bespoke end-to-end technology and a dedicated team of over 120 people across onboarding, settlement, compliance, client services and technology. The result is a service offering that can better meet the needs and pressures facing the alternative investment market, whilst unlocking powerful new levels of efficiency, visibility, and connectivity.

We receive revenues from the platform in the form of annually recurring account fees (which are recognised over a 12-month period) and commissions on spot trading. Revenues for the Alternative Banking Solutions division grew over 47% against H1 2021 to £13.9m, and the number of live accounts invoiced increased by c. 75% over the 6-month period to 30 June 2022 from 1,746 to 3,061, with record account openings in May and June. Deferred revenue from account fees, which will be recognised over the next 12 months, nearly doubled to £4.0m from £2.2m at FY21, highlighting the increasing visibility within our revenue model.

The product's success to date has been very encouraging, and it is now clear to us that the size of the market opportunity and demand for this service is even greater than we originally estimated. With this comes the opportunity to set our ambitions even higher by accelerating our technology roadmap. To support this, we will be making a proportionate increase in the level of investment into product and technology in the medium term. Since the majority of these investments will be capitalised, this will have a negligible impact on profit in the near term. Furthermore, by accelerating our product roadmap and scalability, future amortisation is expected to be offset by the proportionate acceleration in revenue opportunities created.

As part of our investment in technology, we are partnering with specialist companies that provide high-quality software contractors in the UK. These companies are well-regarded within our own network and beyond, and will provide us with quick access to a strong pool of talent to deliver on our ambitious roadmap. Long-term investors will be familiar with the fact that in 2020 we made the decision to wind down all offshore technology contractors in order to bring everyone in-house. At the time, our reasons for this were simple - if we wanted to have market-leading technology that was built to last, we needed to apply the same standards to the team behind it. Today, however, our technology team is far more established, and we can therefore integrate contractors without sacrificing the sustainability of the team and culture. Furthermore, all new contractors that join us will be working within our existing delivery teams, thereby ensuring they are properly integrated.

People & Offices

Emerging from lockdown has enabled us to accelerate hiring, with 74 new team members added in the Front and Back Office (more than were added in the whole of 2021). This resulted in overall headcount increasing from 214 to 288 in the period. Our internal recruitment team also continues to make excellent progress, helping us increase Group Front Office headcount by 34.

Whilst we are conscious of the pressure that the current macro-environment is having on staff retention and wage inflation, we remain confident in our ability to provide attractive remuneration packages, with our employee equity schemes remaining a stand-out factor in our industry and beyond.

Alongside remuneration, our office working environments play a key role in attracting and retaining talent and maximising employee well-being, morale and performance. Having seen the impact of launching our new London HQ back in 2019, we remain committed to ensuring that world-class office spaces are a milestone that all divisions can work towards as part of their growth stories. Accordingly, our sales office in Amsterdam completed moves to a new state-of-the-art office space in the half, representing a powerful motivational environment as the team embark on the next stage in their journey.

In Malta we have agreed in principle to a ten-year lease on a new 20,000 sq. ft. office, which will allow us to continue growing our Compliance, Client Services, and Technology teams within the Alternative Banking Solutions division. We are incredibly excited by the quality of talent we have been able to hire since launching inside the country at the start of 2021, with the team in Malta having already grown to 60 people by 30 June 2022. Based on the current demand for our Alternative Banking Solutions, the team is expected to grow to over 180 people over the next three years.

Market Developments

Whilst the macro environment in which we operate remains complex, we have not seen any material direct or indirect impact from the Russian invasion of Ukraine, nor any noticeable negative impact from higher levels of inflation or slowing economies. Our financial model also builds in some natural protection against the macro-economic headwinds: for example, in an environment where prices rise, the volume of currency our clients need to trade will typically rise too.

Where we do however see changes is in the trading psychology of clients. For example, with the recent rapid appreciation of the US Dollar against the Euro, some clients purchasing Euros will be reluctant to hedge until the rate returns to historically more favourable levels. Equally, those on the other side of the equation will often be tempted to hedge more than they should, and potentially become 'over-hedged'. As an FX risk management specialist, our role is to advise clients on a pattern of trading that protects their competitive position, and not take unnecessary risks or speculate. Nonetheless, in times of heightened volatility, we can see more pronounced imbalances in trading activity month on month.

At a Group level, our balance sheet strength, diversity of clients (full details of which can be viewed on our website) and the nimbleness and robustness of our credit control systems means we can continue to grow our FX forward book with confidence. Indeed, we are already winning new business as a result of competitors lacking the capital and detailed underwriting ability needed to confidently provide competitive terms in the current climate. This is not to say that we are being cavalier in our approach to underwriting credit - in fact there were no new material bad debts in the first half of the year. Equally, as our business continues to grow and we underwrite more facilities, the Group expects that some defaults and losses will occur, particularly in more challenging macro environments. Importantly however, such losses are factored into our expectations each year and are ultimately inherent in any business that extends credit. The key is maintaining the right balance between risk and reward.

Although we provide our clients with credit facilities for hedging, our terms and conditions ensure all future client trades are at our discretion. We can therefore react quickly to changes in the macro environment or individual client profiles by refusing future trades, thereby capping our exposure to past trades only. This reduces our risk exposure and poses significantly less risk than providing committed credit facilities. In addition, unlike a typical lending/borrowing facility we are only exposed to the deviation in MTM value of the FX contract (which could be in or out of the money) and not the notional value of the trade.

Looking across our competitive landscape, an uncertain macro environment and ever-increasing UK and European regulation has driven further consolidation of our non-bank competitors. Four of our key non-bank competitors have been acquired and/or merged - three in the last 12 months alone. For Alpha, this is welcome news. As our peers consolidate and centralise, their businesses move further towards the type of model we have worked so hard to avoid through our decentralisation strategy. Subsequently, they become slower and more complex like their traditional bank rivals, typically targeting a broader marketplace with more generic solutions, whilst their people become numbers within a system and disempowered. As a cash-rich, debt-free, long-term focused PLC with a highly decentralised and thus focused and agile business model, we are well-positioned to win market share from these providers, many of which also often lose momentum and motivation as they move towards pre-defined investment horizons. I would however like to remind investors that the banks remain our predominant competition, holding the vast majority of market share… at least for now!

Use of cash

The Group's cash conversion continues to grow, providing adjusted net cash of £97.5m at the period end. With considerable cash reserves, the question of how we put this to best use and whether we should return cash to shareholders via increasing dividends or buybacks, is understandable. To help investors better understand how we view and use our cash internally, I have provided a summary as follows:

· Cash for existing investments

We continue to use our cash to invest in both our FX Risk Management and Alternative Banking Solutions divisions. FX Risk Management has a 12-year track record of trading, and therefore the appropriate levels of investment required to grow are more forecastable. Our Alternative Banking Solutions division however is in a far more nascent stage and is a first mover in a marketplace that continues to exceed our expectations. We therefore believe it is prudent to ensure we have sufficient cash kept aside to ensure we can capitalise not only on the opportunities we have now, but also have the ability to accelerate investment in the future, if faced with even greater upside.

· Cash for regulatory capital

The Group is required to set aside regulatory capital against the client balances it holds as part of its global account's solution, and when entering into forward and derivative trades. The amount of regulatory capital includes a calculation based on the percentage of client balances held, and the volume of our trading positions in the market.

As our business grows and the average size of our clients increases, both the balances we hold for our global accounts solution and the size of forward and derivative trades we enter into, are becoming larger, resulting in a growing requirement for regulatory capital.

· Cash for collateral on hedging facilities

As we expand our FX forward book, the amount of cash required for collateral will also increase. The step change in the size of clients we are supporting (and therefore the size of trades we place) is also increasing the proportion of free cash we need to support this. It is therefore important we have sufficient cash set aside to capitalise on all the opportunities in front us and provide attractive terms versus our competitors.

· Cash for confidence

As a financial services business handling large amounts of client money, the strength of our balance sheet is a key consideration for clients looking to work with us. Furthermore, the larger our clients become, the greater (typically) their expectations for how large our balance sheet needs to be. Maintaining a strong balance sheet is therefore important in ensuring we can continue to move up the 'food chain' and win the business of larger clients.

· Cash for new investments

The Group has strong appetite to launch new products and services in the future that have synergies with our existing business and can amplify our growth opportunities. Naturally, this will require additional investment.

When taking all of the above into consideration, we are confident that 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 our cash position becomes excessive, will look to adjust.

Financial Review

In the six months to 30 June 2022 revenue increased by 35% over the prior period to £46.1m. The revenue includes £1.4m (6m to 30 June 2021 - £0.2) relating to the recharge of bank fees incurred by the Group on Euro E-money wallet balances which attract a negative interest rate, with the cost being directly passed to the client.

The FX Risk Management division focuses on supporting corporates and institutions that trade currency for commercial purposes through the Group's sales teams located in London, Toronto and Amsterdam, together with the Milan office that was established in the period. Revenue grew by 31% over the prior year to £32.3m. Alternative Banking Solutions revenue grew by 47% from £9.5m in the prior period to £13.9m. There was an acceleration in the number of client accounts opened in the period to send, hold and receive their funds and the total number of accounts at 30 June 2022 was 3,061 (30 June 2021: 904, 31 December 2021 1,746). Revenue from annual account fees is recognised on a straight-line basis over the 12 months from the date the account is opened and deferred revenue in the period increased from £2.2m at 31 December 2021 to £4.0m.

Underlying profit is presented in the income statement to allow a better understanding of the Group's financial performance on a comparable basis from year to year. The underlying profit excludes the impact of share-based payments, and on this basis, the underlying profit before tax in the year increased by 16% to £18.0m.

In the six months to 30 June 2022 there has been significant investment, including the launch of the Milan office in March 2022. A total of 74 new team members were added in the period across the Front and Back office primarily focused on business development, client services and compliance, compared to a total of 67 heads across the full year in 2021.

The underlying profit before tax margin for the period was 39% (FY 2021: 43%) reflecting the increased investment in our cost base as well as more normalised travel and entertaining with the impact of COVID subsiding. If the impact of the gross up of bank fees recharged to clients for negative interest rates is excluded, the underlying profit before tax margin is 40% (FY 2021: 44%).

The effective tax for the period of 16.5% has benefitted from the tax relief on the exercise of the SAYE options, whilst the effective tax rate in FY 2021 of 21.5% was impacted by the tax on the transfer of clients to Malta.

Underlying basic earnings per share increased by 21% in the period to 33.7p (H1 2021: 27.9p) whilst basic earnings per share were 33.3p (H1 2021: 27.6p).

Balance sheet

On the balance sheet there is a requirement to show all outstanding forward and option contracts at fair value. The liability to our banking counterparties with respect to these trades is shown net, with the corresponding client position shown as an asset or a liability depending upon whether the trade is in or out of the money.

The total derivative financial assets within trades & other receivables (note 9 of the Interim Report) of £141.7m (£35.0m in non-current assets and £106.7m in current assets) represents an increase of £65.8m since the year end with an offsetting increase in derivative financial liabilities and other payables (note 11).

As a result of the strong growth in the period, total net assets increased from £109.8m to £121.2m.

Cash flow

On a statutory basis, net cash and cash equivalents increased in the six months to 30 June 2022 by £17.9m to £126.0m. The Group's cash position can fluctuate significantly from period to period due to the impact of changes in the collateral received from clients, early settlement of trades, or the unrealised mark to market profit or loss from client swaps, resulting in an increase or decrease in cash with a corresponding change in other payables and trade receivables. Therefore, in addition to the statutory cash flow, the Group presents an adjusted net cash summary below which excludes the above items.

In the period to June 2022 adjusted net cash on this basis has increased by £9.3m to £97.5m. This represents the net impact of the cash conversion from the trading in the period together with the cash inflow of £4m from the client subject to a repayment plan.

* Included in 'other payables' within 'trade and other payables'

** Excluding collateral received from clients, early settlements and the unrealised mark to market profit or loss from client swaps

Dividend

The Board is pleased to declare an interim dividend of 3.4 pence per share (2021: 3.0 pence). The interim dividend will be payable on 7 October 2022 to shareholders on the register at 9 September 2022. The ex-dividend date is 8 September 2022.

Any questions?

As our shareholder base has grown and become more diverse, we feel it is important to ensure that all investors have the same opportunity for Q&A. We will shortly therefore be adding a section on our investor relations site that will enable investors to submit their own questions, whilst also seeing the answers we have given to others.

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position