Alpha FX - Expectations-beating and LT Compounding Potential

Saturday, Dec 01 2018 by
30

High quality compounders are gems, but rare beasts for UK investors

High quality, compounding stocks are the holy grail for small cap investors. Many of these operate with disruptive business models and normally have some form of technology embedded that creates a barrier to entry. These stories can compound, year after year, for 10-20 years if onboarded at an early stage, and if the business models are profitable. Unfortunately for UK investors, while many of these business models exist, the cream of the crop are usually run as private businesses before being listed onto the US markets, rather than the UK ones, lured by the higher valuation multiples. But to do that you need critical mass and a market capitalisation over >£500m ideally. The most common mistake I've seen investors make with these stocks is selling out when the valuation starts to become toppy, failing to appreciate their ability to continue outpacing expectations. In my experience, when the sole reason for selling a stock is its valuation, when the growth runway is long, and the company is small, this is often a mistake.

But there are some in the UK markets and Alpha FX is an underappreciated choice

Because of this, these long term compounders are generally under £500m in the UK and are few and far between. There are several I like the looks of, including Sopheon (LON:SPE), Ideagen (LON:IDEA), On the Beach (LON:OTB), Bioventix (LON:BVXP), Zotefoams (LON:ZTF) and Tracsis (LON:TRCS). However, my pick of the bunch heading into the new year, is a £230m player called Alpha FX. The stock has stormed out of the gates since it listed in April 2017, raising £13m, but in my opinion, Alpha FX has all the hallmarks of a high quality compounder, with potential to smash current market expectations over the course of 2019. At 630p to buy, my price objective is 945p in one year's time. 

5c026d7bdcec2AFXprice.PNG

What does Alpha FX do?

Alpha FX (LON:AFX) is an FX provider. The company's heritage was in providing FX solutions (consultancy, technology platform, spot and derivative trades) to small and medium sized corporates, but has scaled rapidly, to an expected >£20m of revenues this year. Clients have also been scaling up, and disclosed names now include the likes of…

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Alpha FX Group PLC is a corporate foreign exchange (FX) broker with a focus on helping its clients to control the impact currency volatility has on their business. The Company operates Alpha FX. Alpha FX develop tailored hedging programmes that help businesses balance when, how much and how far forward to buy currency. Its Approaches include Passive Hedging, Active Hedging, Hedge Accounting, Dispute Resolution and Key Features. Passive Hedging Strategies are focused on protecting businesses from the unpredictable nature of currency markets in order to provide a predetermined level of financial stability. Active Hedging Strategies provide the protection and stability of a passive strategy. Hedge Accounting helps businesses, who are susceptible to volatility in their Profit and Loss over their reporting period. Dispute Resolution provides a resolution to mis-sold FX options. Key Features include technical analysis, hedging facilities, settlement, reporting and pricing. more »

LSE Price
650p
Change
-2.3%
Mkt Cap (£m)
246.9
P/E (fwd)
n/a
Yield (fwd)
n/a



  Is LON:AFX fundamentally strong or weak? Find out More »


6 Posts on this Thread show/hide all

crazycoops 2nd Dec '18 1 of 6
1

An excellent write up Eric, thank you. I am leaning more towards defensive options at the moment but there are enough hooks in this article to get me researching Alpha FX (LON:AFX) in more depth. I will add any questions/observations to this thread.

Cheers
Simon

Blog: Share Knowledge
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ericpiralta 2nd Dec '18 2 of 6

In reply to post #423708

Thanks for the comment Simon, glad it was handy. I'd say Alpha would be a really defensive option because of its business model if valuation wasn't a consideration, but anything can de-rate if things get really bad. Which is why I think the potential for more "trading ahead of market expectations" is critical in this macro environment and should support the stock if I'm right

Keep up the great work with your web diary btw.

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john652 2nd Dec '18 3 of 6

Good piece Eric, and thanks for writing this and putting in so much effort, it makes Stocko such a great site. I hold after reading the company reports and looking and listening to the management. I also think they have buy out optionality. I’ve worked with the corporate fx teams in a couple of large banks and they are woefu and expensive , alpha fx have carved out a dedicated service and the market is for the taking, which the numbers seem to imply as they are growing fast.

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Andre Schmidto 2nd Dec '18 4 of 6
1

Eric,
Thank you for sharing your valued research and hard work with us. A great piece, I enjoyed reading this. The list of other companies besides AFX which you’d possibly like to own is interesting too. I own a small amount of Craneware but haven’t been able to add due to valuation, the share price seems to hold up well. Incidentally, the first narrative I read of yours was FFI, which was great too. I don’t own either AFX or FFI but will keep my eyes on them to see how things go.
Thanks again for sharing.
Regards,
Andrew

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bestace 2nd Dec '18 5 of 6
5

Nice write-up, thanks for sharing your research.

Yes the banks are terrible and expensive for FX services, which provides an opportunity for others to take business away from them, but I'm not sure that (and a slick portal, supposedly) is enough to constitute an enduring competitive advantage.

When I was in a position to decide which FX service providers my then employers should be using, I was regularly cold-called by all manner of companies offering their services. My impression is that this field is incredibly competitive so I'm a bit sceptical that Alpha FX (LON:AFX) can retain in the long-term any competitive advantage they may currently have, which is surely a necessity if they are to be considered a long term compounder.

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esfinancial 27th Jan 6 of 6

Excellent article - appreciate it!

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