Impressive figures

I’d dump Barclays and the other banks and invest in vibrant firms in the wider financial sector such as Alpha Financial Markets Consulting (LSE: AFM). The company provides consultancy services to the asset and wealth management industry worldwide.

Today’s full-year figures are impressive. Revenue increased by just over 15% compared to the previous year and adjusted earnings per share jumped up 23%. The directors moved the total dividend for the year a little over 16% higher in a show of confidence.

Chairman Ken Fry explained in the report that the directors think the structural drivers in the asset and wealth management industry include pressure on fees, increase in assets under management and regulatory change. Alpha is “well placed to adapt to its clients’ evolving needs and to deliver ongoing growth,” Fry reckons, despite current “geopolitical uncertainty.”

During the period, Alpha increased its client count by almost 16% to 279 and opened its first office in the “German-speaking” market, in Zurich. There are now 10 offices around the world. Other highlights include the launching of two new business practices in FinTech & Innovation and ETF & Indexing. Meanwhile, the firm’s consultant-count grew by 19% to 362.

Acquisitive and organic growth

Alpha is pursuing a bolt-on acquisition programme on top of driving organic growth, which is a well-trodden route to expansion. I think it’s a good idea to attack growth on two fronts like that. Acquisitions bring “new products and recurring revenue to the business” Alpha points out. Emboldened by the first acquisition in 2017 of TrackTwo, which has integrated well, the directors have been on the hunt for more and today announced the acquisition of Axxsys.

The acquisition will start to increase Alpha’s earnings straight away by extending the service offering to cover the SimCorp platform, which is an “integrated front-to-back portfolio management system.” The directors expect a cross-selling opportunity, and Alpha’s geographic footprint is widened by the acquisition, which has strong trading in the Nordic regions and Canada.

A healthy balance sheet

Alpha first arrived on the stock market in October 2017 and since then has been posting double-digit percentage annual increases in revenue, earnings and the dividend. City analysts following the firm expect such growth to continue, and I find today’s organic expansion figures and the news on acquisitions to be encouraging.

There’s no debt on the balance sheet and a healthy net cash position of around £18.5m. Meanwhile, with the share price close to 238p, the forward-looking price-to-earnings rating for the trading year to March 2020 is close to 17.5 and the anticipated dividend yield is just over 2.7%. I think Alpha deserves its full-looking valuation and I’m tempted to pick up a few of the shares to see what happens.

Obviously, any investor on the outside looking in will feel irritation at having missed out on this tremendous return, but the pertinent question to ask is whether this sort of return can be repeated in the future.

Well, the bull case for Blue Prism has merits. The company sells what it calls ‘automation robots, which may bring to mind iRobot but in reality are more Office Space as they’re actually software programmes that perform just the type of repetitive, mind-numbing back office work that leads office workers to destroy printers in a field!

The market for this sort of software is understandably massive as companies of all stripes look to cut costs by replacing humans performing low-end work with much cheaper software. Indeed, Blue Prism is growing at a rapid clip with 223 new customers brought on board in the six months to April and that helped boost revenue by 145% year-on-year.

However, even with revenue doubling during the period, the company’s turnover was still only £22.9m which, compared with its market cap of £1,500m, shows just how much future growth investors are already counting on.

And while revenue is growing quickly, so are costs and in the same period losses widened from £3m to £5.4m as staffing costs more than doubled. Of course, with the group growing so quickly and investors willing to continue pumping cash into the business, this isn’t a huge worry. Still, it does make the company’s valuation look even crazier in my eyes.

Over the long term, I also worry about the highly competitive nature of the sector. Blue Prism is far from the only player in this burgeoning sector and as it grows, competition is sure to increase as bigger tech players enter the field. So, while Blue Prism has high potential, I can’t look past the fact that this loss-making business is valued as highly as it is while competition in the sector heats up.

Investing in humans instead of software 

A less highly-valued but still fast-growing business I have my eye on instead is asset management consultancy Alpha Financial Markets Consulting (LSE: AFM). Last year, the group’s sales increased 51.5% to £66m as cost pressures and regulatory scrutiny led asset managers to hire the group’s consultants to advise on M&A integration, ways to trim costs without sacrificing capabilities and how to implement new technology, among other areas.

Encouragingly, the group’s business provides fairly high margins with EBITDA last year hitting £13.9m, although £7.1m in financing charges related to the group’s IPO led to a small statutory loss. Looking ahead, I think the group is a good position with IPO proceeds wiping out all debt, margins growing, opportunities for organic growth as it opens new offices in Asia and the US, and potential for inorganic growth via small bolt-on acquisitions that bring in experts from a broader range of areas.

Plus, with a valuation of under four times full-year sales and a decent 2% yield, I think Alpha is far more attractively priced at present than Blue Prism.

Alpha provides consulting and related services to clients in the asset and wealth management industries. The company already works with 80% of the world’s largest asset managers providing services such as advice on compliance and regulation, mergers and acquisitions, IT solutions and marketing. Put simply, Alpha is a one-stop shop for financial companies’ business management. 

The current environment is perfect for businesses like this.  Financial firms are spending an ever-increasing amount of time dealing with regulators’ demands and, at the same time, competition is forcing fees down across the sector. Companies are having to do much more with less cash, which is pushing them towards corporations like Alpha that can meet all of their needs at a much lower cost than setting everything up in-house. 

Explosive growth

Today the company has reported its first set of figures as a public company for the six months to the end of September (before its IPO in October). 

For the period, the firm reported revenue growth of 50% and gross profit growth of 59% to £10.5m. Adjusted earnings before interest, tax, depreciation and amortisation jumped 71% to £5.8m. This is apparently the “most successful six-month period in our history“, and shows how Alpha is profiting from the rising demand for outsourced ancillary services in the financial sector. 

Following the IPO, Alpha has been able to pay down its net debt pile of just over £85m, giving it scope to reinvest heavily in expanding its business. Management is targeting the US and Asia as key areas of expansion.

As part of this drive, the group’s first office was opened in Asia this year and management has increased the number of consultants working in the US by 33%, which has helped drive a 100% improvement in revenue. Together, the US and Asian businesses only currently account for 14% of total group revenue, so there’s a tremendous opportunity here. If both of these markets grow to the same size as that of the UK (£17.8m in sales for the six months to 30 September), I estimate the group’s annual gross profit will more than double to £46m. 

Undervalued growth 

At the time of writing, City analysts are expecting the group to report a pre-tax profit of £11.3m for the year ending 31 March 2018, rising to £12.4 for 2019. 

I believe that these forecasts are highly conservative. As Alpha’s half-year figures show gross profit growth of 59% for the period, as the company invests in its overseas offering, I don’t see why this rate of growth cannot continue. If this rate of growth does continue, the shares look to me to be undervalued as they currently trade at a forward P/E of 18.7, cheap in my view for a firm growing revenue at a rate of 50%.