REG - Alpha Group Intl PLC - Trading Update

Alpha InternationalAnnouncement

18/01/2024 07:00

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RNS Number : 0676A  Alpha Group International PLC  18 January 2024

18 January 2024

Alpha Group International plc

 

("Alpha" or the "Group")

 

Trading Update

 

Alpha Group International plc, a high-tech, high-touch provider of financial
solutions to corporates and institutions, today provides a trading update for
FY 2023.

 

Unaudited Financial highlights 1 

 

 -          Revenue up 12% to £110m (FY 2022: £98.3m)
 -          Profit before tax up over 140% to c. £115m (FY 2022: £47.2m)
 -          Underlying profit before tax grew 10% to c. £42m (FY 2022: £38.6m)
 -          Consistent underlying profit margins of 39% (FY 2022: 39%)
 -          Other operating income from interest on client balances of over £73m (FY
            2022: £9.3m)
 -          Very strong balance sheet, cash and liquidity position with adjusted net cash
            increasing by over £60m to over £177m
 -          Alternative Banking Q4 2023 client balances increased by 31% against the same
            quarter last year, at £2.1bn (Q4 2022: £1.6bn)

 

Business highlights

 

 -          Benefits of diversification strategy clearly evidenced in resilient revenue
            and strong profit growth
 -          Disciplined approach to credit and risk reflected in the lowest level of
            client defaults in the past five years
 -          Investment programme yielding substantial efficiencies, with operational
            gearing opportunity in 2024 and beyond, and hiring now predominantly focused
            on Front Office
 -          Launch of new Fund Finance division in May 2023
 -          Launch of new Corporate FXRM offices in Madrid and Munich
 -          Completed the Group's first acquisition, of Cobase, in December 2023

 

 1  Numbers exclude Cobase, which was acquired on December 1 2023, and during
the month generated revenue of £0.2m, EBITDA of £0.0m, and a PBT loss of
£0.2m.

 

 

Overview

 

The interest rate environment throughout 2023 drove exceptional levels of
client balance interest income, profit, and cash. However, this same
environment has also suppressed the activity levels of both our corporate and
institutional clients, resulting in a more challenging trading environment. We
describe this dynamic internally as our 'natural interest rate hedge'.
Overall, revenue and underlying profit both continued to grow, demonstrating
the appeal and resilience of our offering, albeit the rate of underlying
growth was marginally lower than expected due to prevailing economic headwinds
throughout the year. Q3 was our most challenging sales quarter in the year,
coinciding with peak levels of macro uncertainty around interest rates and
inflation. In Q4 however, we were pleased to end the year with a record
revenue quarter for the Group, as we started to see activity levels increase.

 

For FY23, Group revenue is expected to have grown by circa 12%, underlying PBT
by circa 10%, and statutory PBT (which includes interest income from client
balances) by over 140%.

 

Throughout the year, we made significant investments in operational
scalability, product, risk and governance. This should significantly reduce
our requirement for operational headcount growth in 2024 compared to previous
years. Furthermore, with the operational scalability in place, a growing
portfolio of market-leading solutions, and average sales productivity 2 
increasing, we will continue to invest with confidence in growing our Front
Office teams across our global locations in 2024, in order to capitalise on
the vast market opportunity in front of us.

 

Whilst the macro environment could remain challenging in 2024, we remain
confident in our strategy to take advantage of the vast growth opportunity.
Our full-year results statement will be published w/c 18(th) March 2024. Ahead
of this, we have also provided an initial summary of our performance across
our key product lines below.

 

(2) Front Office productivity is measured by dividing our Group FXRM revenue
by the cumulative tenure of our FXRM sales team.

 

FX Risk Management

 

Throughout 2023, the challenging macro conditions described in our Interim
Report resulted in a noticeably more conservative approach to forecasting and,
thus, FX hedging amongst our client base. At the same time, these macro
conditions meant we chose to tighten our own credit appetite, particularly in
the first nine months of the year when central banks were continually
increasing interest rates and we were still seeing high levels of inflation
globally. This created significant uncertainty around how high rates could go,
and therefore, when taking into consideration our clients' ability to service
their debts, we chose to take a more conservative approach, resulting in a
number of clients having hedging facilities reduced or removed. This
disciplined approach ensured we had no significant defaults during the year
but also meant we walked away from revenue opportunities. Additionally,
despite the challenging sales environment, our team upheld Alpha's high
selling standards, guiding clients towards what they need, rather than what
they sometimes want, and in particular, discouraging clients from using more
complex derivative products. Such products tend to tempt clients with
immediate short-term benefits of a more favourable exchange rate today, at the
expense of committing the client to a potentially more undesirable exchange
rate in the future, therefore serving no logical purpose in a genuine risk
management strategy. Guiding clients away from these products resulted in a
68% reduction in complex options revenue in the year, and whilst unfortunately
we are currently seeing a trend within our industry of more complex products
being sold, we believe upholding our principles will serve to support higher
quality revenue growth in the long-term, and protects the best interests of
our clients as well as our reputation in the market. As referenced in our last
annual report, we changed our team's commission structure at the end of 2022,
deliberately paying significantly lower rates of commission on more complex
products, whilst celebrating and incentivising scenarios where they
successfully talk clients down from more complex ones, to using simpler ones.
 

 

Our diversification strategy has also paid dividends, with growth from our
Institutional FXRM business and our overseas offices offsetting the economic
headwinds being felt in our UK Corporate business. These factors have
contributed towards overall revenue growth of 10% to £76m for the year (FY
2022: £69.5m), and client numbers growing by 2% to 1071. Average revenue per
client also continued to increase, reflecting our continued focus on working
with larger businesses as well as increasing wallet share with existing
clients, as our reputation continues to grow. To understand the performances
across our different offices, we have provided a breakdown as follows.

 

Our UK Corporate office experienced a decline in revenue this year and has
remained the most impacted by the economic environment. This is primarily
because it has the largest and longest-standing client base and has therefore
also been affected the most by the adjustments to our credit appetite.
Additionally, our UK office has historically served as the talent incubator
for cultivating leaders to spearhead the establishment of overseas offices,
and, therefore, during this more challenging period, the team have missed some
of this talent. With our current overseas offices now established, there is no
further need to export talent from the UK for the time being, and we are
confident this marketplace remains an enormous growth opportunity within its
own right.

 

In Europe, our Corporate offices in Amsterdam and Milan continued to deliver
strong year-on-year growth, whilst our Madrid office, setup in H1 2023 by a
team of four with 15 years' combined Alpha experience pitching from the UK, is
already trading strongly. In Q4, we also launched a new office in Munich,
Germany, creating our fifth growth runway into Europe.

 

Beyond Europe, our Corporate Australia office has continued to deliver good
revenue growth and has been established by a core team with over 30 years'
combined experience working at Alpha. This has created excellent foundations
from which to grow in Australia, whilst also providing the Group with the
ability to service its global client base 24/7.

 

Our Corporate Toronto office remains profitable but ended the year with
revenues slightly down. Those who have followed our updates over the last 18
months will know we have been rebuilding in Toronto, and at the end of 2023 we
introduced new leadership. The early performance and feedback from the team
since making these changes has been encouraging, and we are confident that we
are starting 2024 with stronger foundations in Toronto.

 

Our Institutional FXRM office (based in the UK) continued to show particularly
strong growth in the period, with revenue increasing over 55%. Given the
contraction in the alternative investment market as a whole, this has been an
outstanding performance and, alongside the team's hard work, reflects the
growing reach of the division, as well as the increasing cross-selling
opportunities through our Alternative Banking solution and, more recently,
Fund Finance. Launching in 2018, the Institutional FXRM team has quickly
established a strong reputation and loyal client base within the Institutional
space, and given the growth they've delivered in a suppressed market, we are
excited about their potential once market activity picks up again.

 

Outlook for FXRM

 

The macro backdrop to 2023 certainly provided challenges to the growth of our
FXRM revenues. The growth prospects for FXRM heading into 2024 however remain
exciting. Prior to the start of 2023, we had a large runway and robust
strategy to continue delivering long-term growth with our existing FXRM teams,
markets and products. Throughout 2023, we have continued to make significant
investments to further enhance the FXRM division's potential, including the
opening of two new offices, an 18% increase in Front Office headcount to 120
people (FY 2022: 102), investment in our online platform, and the exciting
acquisition of the treasury-focused fintech, Cobase, in December 2023. At the
same time, average revenues per client continue to increase, alongside Front
Office Productivity, and we have built in significant amounts of operational
scalability through our investments in people and technology.

 

At our IPO in 2017, we set a strategy to "land and expand". The first part of
this strategy (the "landing") has very much been focused on establishing our
overseas offices, and ensuring we have the operational foundations in place to
scale. With six overseas FXRM offices across three continents launched, and
the investment required to scale reaching its "cruising altitude", we are now
looking forward to doubling down on the "expansion" phase of our strategy and
benefitting from more operational leverage as a result of the investment made
in the year. We will now place a particular focus in 2024 on scaling our Front
Office sales teams in our current offices, whilst continuing to uphold our
selling standards, in order to deliver strong and sustainable revenue growth.

 

 

Alternative Banking

 

Within the alternative investment market, the decline in deal activity
experienced in the first half of 2023 continued throughout the rest of the
year, with deal volumes and flows significantly down on 2022 across all of the
key asset classes served by our Alternative Banking division. Despite the
macro-economic headwinds, revenues increased by 18% to £34m, and in addition
to this revenue, our Alternative Banking solution has enabled us to generate
over £73m in Other Operating Income from interest on client balances (2022
£9.3m), which grew from an average of £1.6bn in Q4 2022 to £2.1bn in Q4
2023.

 

Reduced deal activity in the alternative investment market impacted demand for
new accounts, payments and FX spot transactions. Consequently, growth in
account numbers was lower than expected, with the team ending the year with
just under 6,500 accounts against our updated forecast of 7,000 - a growth
rate of c. 50% against the 4,200 accounts we had in FY 2022.

 

Despite the temporary downturn in investment activity within our core markets,
it is encouraging that we have been able to continue to grow, and we are
excited about the prospects for Alternative Banking as this slowdown unwinds
and normal business activity resumes, which we feel will likely follow
interest rate cuts. Our growing market presence and scale means we are
well-positioned to capitalise on any unwind, and can do so with increasing
levels of operational efficiency. Our product remains highly attractive, and
our strategic investments in technology and automation made throughout the
year will not only lead to a better service for our clients but also reduce
our time and cost to serve them - enabling us to do more with less. This
step-change in scalability and efficiency will also likely reduce the level of
operational headcount growth we need in Alternative Banking from this point,
whilst giving us the confidence to significantly grow our Front Office teams
in 2024 within this division.

 

Alternative Banking also plays an important role in providing a whole product
solution to the alternative investment market, acting as a gateway product
that facilitates cross-selling with our FXRM and (more recently) Fund Finance
divisions.

 

Net Interest Income from Client Balances

 

As previously outlined, our average client balances grew by 31% between 2022
and 2023, as we continued to open more accounts and grow wallet share with
clients. The interest rates we received on these balances meanwhile averaged
3.6% for the year. Together this resulted in over £73m of other operating
income for the year - an increase of over eight times against FY 2022. A
quarter-on-quarter breakdown of our average client balances and the interest
rates we received is shared below.

 

 Quarter in 2023  Average Balance  Average Interest Rate
 Q1               £1.6bn           2.8%
 Q2               £1.9bn           3.8%
 Q3               £1.9bn           3.8%
 Q4               £2.1bn           3.8%

 

Fund Finance

 

Launched in May 2023, our fund finance offering had an excellent start, ending
the year with the launch of the industry's first online platform for
connecting borrowers with lenders.

 

Our fund finance offering embodies Alpha's hallmark 'high-tech, high-touch'
approach to business, combining specialist expertise with smart technology to
disrupt industries that are both outdated and have high barriers to entry.
This is evidenced in the early success of the division. We are excited to
report that our solution is already proving popular. Despite this, we have
further medium-term ambitions for the technology, providing an exciting
roadmap for the future.

 

With its focus on the alternative investment market, our fund finance offering
has, and will continue to, benefit from cross-selling opportunities with
clients that come from Alpha's Institutional FXRM and Alternative Banking
teams. At the same time, the Fund Finance team is already reciprocating by
creating new business opportunities of their own, which can then be sold
Alpha's other services.

 

Our expansion into fund finance is another important part of our vision to
become a global leader of financial solutions for the alternative investment
market - a bank alternative, dedicated to Alternatives.

 

Cobase

 

The process to acquire Cobase began in September 2023 and was completed in
December 2023 (see announcement here
(https://polaris.brighterir.com/public/alpha_group/news/rns/story/w9me4gx) ).
Despite the fact that the acquisition process can be fairly disruptive, Cobase
grew revenues by c. 67% to €2m(3) in FY 2023, with all revenues derived
through SaaS subscription fees. In addition, the client base has increased by
c. 67% during the year, to end 2023 with over 130 clients.

 

Cobase's solution has proven highly attractive amongst medium to large
corporates. Its SaaS model lends itself to scaling a valuable and integrated
client base with excellent levels of retention. Our initial strategy focuses
on helping Cobase to accelerate client acquisition; we then plan to explore
how we can complement these SaaS revenues through cross-selling of products
from our other divisions via our sales teams and digital integration.

 

With Cobase's bank-connectivity technology added to Alpha's stable of
products, the Group is now able to offer our corporate client base a
comprehensive and flexible portfolio of treasury-focused products covering FX,
payments, accounts, and bank management. This is expanding the Group's
addressable market, providing us with the opportunity to become more
integrated with our clients, and also enabling us to engage with new clients,
who may not have engaged us without the Cobase solution, but can still utilise
Alpha's other offerings further down the line. In addition, Cobase has
historically worked with a small number of institutional clients, and having
conducted some further research across our own institutional clients, we
believe there are opportunities for Cobase within our institutional
marketplace too.

 

Having only recently completed the acquisition, it remains relatively early
days; the focus of 2024 is to determine how we can maximise the synergies
between the two businesses in the long term.

 

(3) Only revenue delivered by Cobase after it was acquired in December 2023 is
attributable to the Group, which was c. €200k; however, in order to show a
like-for-like comparison with 2022 this has not been included in the numbers
reported in this update.

 

Morgan Tillbrook, CEO, commented:

 

"Despite a challenging trading environment in 2023, our team have continued to
work hard to deliver profitable revenue growth, whilst also making excellent
progress on our long-term growth strategy. At the same time, our previous
diversification into Alternative Banking has enabled us to benefit from
exceptional levels of interest income. Whilst we have opted to exclude these
numbers from our underlying profit for transparency, the fact remains that
this is very much a by-product of our diversified business model and is
providing us with transformative levels of capital from which we can
significantly enhance our long-term growth prospects. We have already started
to show this in 2023 with the acquisition of Cobase, the launch of our new
Fund Finance division, and new offices in Spain and Germany.

 

The higher interest rate environment has created economic headwinds which have
impacted our underlying revenue momentum. However, the additional operating
income of over £73m that we have generated as a result of this same
environment has more than compensated for this, and highlights the resilience
of our diversified business model. In simple terms, 2023 showed that in a
higher interest rate environment, underlying growth becomes more challenging,
but the cash and statutory profit from interest income becomes exceptional - a
trade-off that, in reality, creates significant opportunities for Alpha's
long-term growth prospects.

 

Nonetheless, as a business that strives for high levels of performance, we
very much remain focused on delivering strong underlying growth, and so whilst
this additional income is a boost, as a team, it is not one by which we will
be measuring our own success.

 

I would like to thank our team for all of their hard work and commitment
throughout the year, and look forward to updating shareholders in more detail
on all of the progress we've made in our full-year report in March."

 

 

This announcement is released by Alpha Group International 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 Group International plc was Tim Powell, Chief
Financial Officer.

 

Enquiries:

 

 Alpha Group International plc                  Via Alma Strategic Communications

 Morgan Tillbrook, Founder and CEO

 Tim Powell, CFO
                                                +44 (0) 20 3100 2000

 Liberum (Nominated Adviser and Joint Broker)

 Max Jones

 Ben Cryer

 Kane Collings
                                                +44 (0) 20 7418 8900

 Peel Hunt (Joint Broker)

 Neil Patel

 Paul Gillam

 Richard Chambers
                                                +44 (0) 20 3405 0205

 Alma Strategic Communications

 (Financial Public Relations)

 Josh Royston

 Andy Bryant

 Kieran Breheny

 

Notes to editors

Alpha is a high-tech, high-touch provider of enhanced financial solutions
dedicated to corporates and institutions globally. Working with clients across
50+ countries, we blend intelligent human capabilities with new technologies
to provide clients with an enhanced alternative to their bank, with solutions
covering: FX risk management, global accounts mass payments, fund finance and
bank management.

Key to our success is our team - over 400 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.

Whilst we are 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.

 

 

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