Alpha (ALPH) beats Brokers' consensus expectations x3 due to substantial hidden income stream

27th Mar by Maddox

13 comments 913 reads

Anyone scanning Alpha International (LON:ALPH) ’s 21 March FY 2023 headline results could be forgiven for thinking that they’d had an OK year:

Group revenue increased 12% to £110.4m (2022: £98.3m)
FX Risk Management revenue increased 10% to £76.3m (2022: £69.5m)
Alternative Banking revenue¹ increased 18% to £33.9m (2022: £28.8m)
Underlying² profit before tax grew 11% to £43.0m (FY 2022: £38.6m)
Consistent underlying profit margins of 38% (FY 2022: 39%)

Pretty respectable, but these headline bullet figures exclude a substantial new line of income - Interest Income on Client Funds. This has grown significantly in 2023 – add that back in – and you get a very different picture such that the Profit Before Tax at £115.9m is greater than their, as presented, reported revenue of £110.4m?!?

So alternatively you could present their results....

‘ALPH's business model provides a natural hedge such that when the economic environment dampens fee income, higher interest rates drive interest income; boosting profits and cash generation.

Group total income rose 73%, with FX Risk Management revenue up 10% to £76.3m, Alternative Banking up 18% to £33.9m but primarily driven by Interest Income up 685% to £73m. Accordingly, reported Profit before tax increased 148% to £115.9m and Basic EPS was up 124% to 206.2p. Net cash increased by £64m up 56% to £178.8m (2022: £114.4m).

So, in fact they shot the lights-out!

Whilst this windfall will clearly reduce with the interest rate cycle it will have generated significant cash to enhance the value of the business. Also, it is unlikely that we'll see a return to ultra-low interest rates and with cash balances growing along with client numbers - it'll continue to be a significant part of the income mix going forward.’

Nevertheless, you’d expect the valuation to temper your enthusiasm and indeed yes Stockopedia has Alpha International (LON:ALPH) on a PE Ratio (f) of 23. Until you realise that the Brokers’ Analysts have also contrived in this fiction, and they have also excluded the interest income from their forecasts.

Alpha International (LON:ALPH) FY23 basic eps 206.2p was x3 the Brokers consensus forecast for FY23 (68p).

Hence with the Brokers consensus eps forecast for FY24 of 78p and FY25 of 90p suggests that we're currently trading on a forward p/e of…

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Kouremenous

28th Mar

Hi Maddox,

I couldn't agree more - a really strange anomaly that I'm hoping the market eventually wakes up to. Been waiting for quite some time so far!

Great timing Maddox - is Alpha finally breaking out today...

Maddox

Thanks Kouremenous,

Well we have the move to the main market in May 2024. This event should bring ALPH to the attention of a different bunch of Analysts as it enters a new investment universe. This could be the catalyst for a re-rating?

Logical David

Excellent writeup Maddox on Alpha International (LON:ALPH) and I like the way you have presented your User Profile.

David.

jagger

2nd Apr

Once it moves onto the main index in May it will head straight into the ftse 250 in June and that’s when it will really appear on international investors’ radars (as well as trackers). If this was trading on any other exchange such as the US it would probably be valued at circa £3 billion i.e circa £70 per share ( look at comparative valuations like Wise group which is valued at £9 billion). I’ve owned it for many years but massively topped up before the party really starts.

Rusty2

10th Apr

Good move up today. I have held this for a few years now.

Plinkut

11th Apr

Thanks for the write-up Maddox, it's had a great move since and I notice it passes 11 screens!

12th Apr

Thanks Plinkut, It's very gratifying when you call it correctly - not always the case ofc. The share price closed at 1835p on the day I published - so as I post we're at 2167p up 18% in just over a couple of weeks. Hopefully, this signifies that investors are looking past the cock-eyed presentation of the results and seeing the value being generated.

Every month that passes with interest rates maintained at current should generate c. £6m in interest income. This income comes will little associated cost so effectively drops to the PBT line. Unless, they decide to acquire another firm I foresee the £20m share buy-back being extended.

Regards Maddox

I read Robbie Burns has been buying, which should help the share price, as he has many followers.

It is also moving from the Aim to FTSE250, next month.

17th Apr

RNS just out - ALPH intends to move to the main market on 2 May, subject to approval of prospectus - further updates due.

Tue 7:41am

Interesting RNS this morning recognising the interest that they are earning . They are racking up over £6m in interest income per month - whilst the interest rates remain high.

It may be an 'uncontrollable' and a 'by-product' but it is very significant - so good that they are highlighting and reporting on it. This will allow us to account for it separately and set our expectations correctly. I very much welcome this move.

I would add, that their core operating business is also being adversely affected by the current economic environment, also clearly outside of managements' sphere of influence.

Rambo

Tue 12:38pm

As an alternative view point - I am not a banker nor even a good investor but I personally feel that Alpha have taken the correct approach with the reporting of "client interest". I noticed at the bottom of their RNS update in explaining "client interest" they state that in 2022 client interest was £9.3million and in 2023 it was £73 million. - With such a dramatic swing in the gain based on interest rate macro conditions and not operational activity, it would be misleading to drop this direct to the bottom line as operating profit.

What surprises me is that there is no news of other financial institutions coming forward with similar statements or is Alpha doing something different to take advantage of these short term overnight deposits that other Financial Institutions are not aware of, or perhaps cannot process these types of transactions.

In conclusion, imo, I would say then that the direction of the share price is based on the "value" perceived from generating this additional cash and how it will be used (further buybacks, acquisitions as suggested by Maddox) At the same time I cant help but think of the old adage " if something looks too good to be true, then it probably is"

Good luck with your investing...

Tue 12:46pm

There have been others reporting gains from interest such as brokers, IG group (LON:IGG) and Hargreaves Lansdown (LON:HL.) have been reporting that, although HL do pay some interest on cash, in share and ISA accounts. Other brokers l think have also been reporting it.

Alpha (ALPH) beats Brokers' consensus expectations x3 due to substantial hidden income stream

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Maddox

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