The GuruFocus All-in-One Screener is a gift that keeps on giving. It is helping me find many amazing stocks in the past. Recently, I used the screener
The GuruFocus All-in-One Screener is a gift that keeps on giving. It is helping me find many amazing stocks in the past. Recently, I used the screener to search for stocks with a GF Score of more than 81 out of 100 as, according to a historical study by GuruFocus, stocks with high GF Scores have tended to outperform their peers in the past.
One of the most promising stocks I found that met this criteria is Alpha FX (LSE:AFX, Financial) which has a GF Score of 97. It also has a strong Financial Strength rank of 9 out of 10, a Growth rank of 10 out of 10, a Profitability rank of 9 out of 10, a GF Value rank of 9 out of 10 and a Momentum rank of 8 out of 10.
The stock is also Modestly Undervalued according to its GF Value chart.
About Alpha FX
Alpha FX, as its name suggests, is a company involved with foreign exchange. It is a leading provider of foreign exchange risk management, accounts and payments solutions dedicated to global corporates and institutions. It is headquartered in London, the world’s the biggest center for forex activity with 38% of global market revenue, according to the latest data from the Bank of England. Alpha FX has a market cap of just over $1 billion.
According to RNS, the news service of the London Stock Exchange, last month Alpha FX released a trading update for the year ending December 2022, which said the company expects full-year profits to be “materially ahead of expectations.” It revealed the company expects to post around 6 million British pounds ($7.1 million) of additional interest income over four months thanks to higher interest rates and highlighted that despite market volatility, client default rates have not been worsening.
Alpha FX is a relatively young company, quoted on London’s AIM since 2017. Following admission to AIM, the company expanded internationally to follow client demand. It has clients based in more than 50 countries and now has corporate offices in Milan, Amsterdam, Toronto and of course London. It provides services to corporation in industries such as in manufacturing, e-commerce and media, but its most significant business is with financial institutions.
The Forex Risk Management services segment is the group’s main generator of revenue. Alpha FX provides foreign exchange spot and derivatives dealing services to its clients and in the first half of this year, the segment accounted for 70% of revenues.
The group is looking to diversify and will be holding a general meeting for shareholders next week to get approval to change the company’s name to Alpha Group International. Its London stock ticker will change to ALPH if this gets approved, which seems likely (but there will be no changes to the company’s ISIN). This is to reflect Alpha’s growth as a business that now offers “a wider (and growing) range of financial solutions.”
The other 30% of revenues come from its Alternative Banking Solutions segment, which deals with clients’ cross border payments and accounts, with recurring annual account fees and trading commissions. This segment is growing faster than the Forex Risk Management segment, up by 47% in the first half of this year.
Alternative Banking Solutions is Alpha’s real growth opportunity in my mind as it is highly scalable. The size of its market opportunity is significant. Alpha has encouraging initial traction with clients from these services.
Track record
What I like about Alpha FX is that it has a strong track record. Revenues have been increasing organically every year since the company joined AIM, which has led to a strong and growing net cash position. Alpha FX avoids speculative trading and has a “formalized and structured” hedging approach, which clients like. Additionally, through its focus on and investment in technology, it has developed a competitive advantage in both its front, middle and back office operations. Given the legacy IT systems at traditional banks, this is a real point of differentiation for Alpha.
Investment in technology and its team, now nearly 300 people based across seven global offices, has caused rising expenses, which has affected profit margins. The pre-tax profit margin dropped by four percentage points to 39% in the first half of the year. However, it takes money to make money, and these investments should drive revenue growth and improved profitability over time.
The first-half results also showed a robust growth in client numbers. Alpha reported that the number of Forex Risk Management clients increased by 11% to 975 and Alternative Banking Solutions accounts were up by 75% to 3,061.
Looking further back, I found that Alpha has grown its client base 10-fold and revenue per client five-fold in the past decade. Given Alpha FX has an international presence, its client numbers have huge room to grow, and I can see it easily winning accounts from large lumbering corporate and investment banks for risk management services.
I also like that management has called higher interest rates a “potentially transitory” situation. It is not counting on interest income to drive growth, even if Alternative Banking Solutions benefits from higher interest rates. This is proven by the fact that the company has grown fast since it first started in 2009, when most of that time interest rates were rock bottom.
The stock is down 7% year to date, which is better than most financials and equities in general. The market cap means it could move into the FTSE 250 Index (and benefit from the related tracker buying) if it decided to graduate to London’s Main Market. It would also benefit from increased corporate governance and disclosure levels should it step up to the Main Market, meaning it could join the investment universe of more professional fund managers.
With the shares trading at 33 times earnings, below the historic median price-earnings ratio of 37, the current valuation represents an attractive entry point to a high-quality growth company in my opinion.
Conclusion
With its fast earnings and customer growth, strong financials and promising GF Score, I believe Alpha FX and its stock has real upside potential. Its rebranding effort is just one piece of the puzzle that shows it can become a much bigger business in the future if it can win international market share. It goes firmly on my watchlist.
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