Since the Brexit referendum, the British Pound (GBP) has seen a systematic decline in value against many currencies — including the US dollar and the euro.
This further intensifies the challenge for organisations that operate on an international scale regarding their exposure to currency exchange rate risks. Something as small as a 1% shift in value can have a significant impact on corporations.
A no-deal Brexit is currently a likely outcome, and companies need to prepare for further volatility in GBP by a process called currency hedging – and that’s where this stock comes into play.
The opportunity
AlphaFX (LSE:AFX) is a founder-led currency risk management and payments solutions firm. It operate in over 30 countries, serving numerous high-value clients with a quality-over-quantity approach.
The risk management segment of the business is essentially a consultancy service. It provides clients with analysis and strategies of fluctuating currency values so that they may hedge their risk accordingly.
The hedging is done through the use of currency and FX swaps. Put simply, these are contracts where one person agrees to sell currency at a specific price in the future, and another person consents to buy that currency at that price.
Typically, these financial services are handled by banks. However, AlphaFX has a unique pay structure: it doesn’t charge fees for advice but rather a commission on all trades executed on behalf of its clients.
This lowers the cost for customers, making it a far more attractive option. It also makes it easier to access for medium to large businesses outside of the FTSE 100.
The second segment of Alpha FX’s business is international payment solutions. While cashless payments technology has improved substantially for consumers, the technology on an enterprise-level remains inefficient.
Large organisations with international operations suffer from these inefficiencies greatly. Delayed payment can set back production, which leads to higher avoidable expenses.
AlphaFX’s payment solutions help to eliminate these inefficiencies through its proprietary technology built on a global banking network. And just like Visa or Mastercard, it charges a small fee for each transaction passing through the system.
The financials
| £m | 2019 | 2018 | 2017 | 2016 | 2015 |
| Revenue | 35 | 23 | 14 | 8.5 | 5.1 |
| Operating Profit | 14 | 9.7 | 5.6 | 4.4 | 2.8 |
| Operating Profit Margin (%) | 40 | 42 | 40 | 51 | 55 |
Top-line revenue has exploded since the 2016 Brexit referendum result was announced. The average year-over-year revenue growth of 35% has also led to a surge of 49% average growth in operating profits.
The low-cost nature of the business has allowed for a high-profit margin of 40%. This has declined from 55% in 2015. However, the cause appears to originate from the firm both investing more capital into its payments solution technology as well as expanding the sales team to attract new clients.
The risk factor
The most significant risk facing the company is the exchange rates themselves. AlphaFX thrives during periods of currency volatility. Thus the recent instability of the GBP has helped attract many new clients. Still, it is unclear how many of those will be retained when GBP strength returns in the future.
Furthermore, currency and FX swaps are complicated financial instruments. A mistake can lock clients into bad contracts which can lead them into paying more.
Profiting from the Brexit referendum
AlphaFX’s low-cost, high-quality approach has built up the reputation of its service with many clients – including household names like Halfords. With the continued uncertainty surrounding Brexit, I think the company is set to continue thriving and rewarding shareholders such as myself for many years to come!