Editing Alpha Financial Markets Consulting plc
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== Summary == | == Summary == | ||
* Quoted on the London Stock Exchange, Alpha Financial Markets Consulting (FMC) is a company that's on a mission to help businesses maximise/improve their profits. | |||
ccc | * The company's flagship offering is the provision of consultancy/advisory services. What makes the offering unique is that it's provided by the largest team of financial market industry experts. Evidence suggests that the provision of consultancy services by the largest financial market industry experts team enables financial market companies to make better business decisions, ultimately leading the companies to maximise/improve their profits. | ||
* The expected return of an investment in Alpha FMC over the next five years is ccc%, according to the estimates of Proactive Investors, which equates to an annual return of ccc%. In other words, an £100,000 investment in the company is expected to return £cc in five years time. | |||
* The degree of risk associated with an investment in Alpha FMC is <nowiki>''medium'</nowiki>, with the shares having an adjusted beta that is 4% above the market (1.04 vs. 1). | |||
* Assuming that a suitable return level over five years is 10% per year, then an investment in the company is considered to be a 'suitable' one. | |||
Is the ultimate objective of the company to focus on 1) asset management, wealth management and insurance industries; 2) financial markets industry (as the name of the company suggest); 3) all industries (i.e. an all industry consultancy company); 4) or something else? | |||
== Operations == | == Operations == | ||
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=== What's the mission of the company? === | === What's the mission of the company? === | ||
The mission of the company is to help businesses maximise their profits, in particular by being recognised as the leading global consultancy to the asset management, wealth management and insurance industries. | |||
=== What's the company's main offering(s)? === | === What's the company's main offering(s)? === | ||
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==== What's a key solution to the problem? ==== | ==== What's a key solution to the problem? ==== | ||
The solution is | The solution is consultancy services. What makes the consultancy services unique is that it's focused on the asset management, wealth management and insurance industries. Research suggests that asset management, wealth management and insurance industries focused consultancy services enable asset managers, wealth managers and insurance companies, respectively, to make better decisions, ultimately leading the companies to improve/maximise their profits. | ||
Client service proposition | Client service proposition | ||
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Alpha Financial Markets Consulting | Alpha Financial Markets Consulting | ||
The group provides advice to its clients in the asset | The group provides advice to its clients in the asset and wealth management industry based on its sector experience and deep knowledge of the needs of specific industry participants. The group’s financial markets consulting proposition extends to working with clients across the four primary areas of: | ||
# Strategy and advisory | # Strategy and advisory | ||
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Projects classification | Projects classification | ||
Projects typically span multiple service lines and vary in size, duration and nature | Projects typically span multiple service lines and vary in size, duration and nature. The group undertakes projects across most of the asset and wealth management value chain and these fall into three categories: | ||
* | * Major programmes: these typically span more than one financial year, are multi-geography and would be valued in excess of £2 million. There are usually 2 to 5 major programmes running in any year. | ||
* | * Large programmes: these are typically up to a year in duration, single or multi regions and valued between £1 million and £2 million. There are circa 10 large programmes undertaken in a year. | ||
* | * Small programmes: these are typically single region, focused programmes valued at less than £1 million. There are usually more than 100 small programmes undertaken in a year. | ||
* The group principally prices its consulting services on a time and materials basis using daily charge out rates, but also uses fixed price contracts on occasions (typically in continental Europe). | |||
Client segments | Client segments | ||
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Asset Managers | Asset Managers | ||
The group has provided services to over 200 clients across the globe, including | The group has provided services to over 200 clients across the globe, including 17 of the 20 largest global asset managers by AUM and 60% of the top 50 as at 31 March 2017. In addition to traditional asset managers, Alpha also advises insurance-backed and pension-based businesses. The group’s clients cover the whole spectrum of institutional, intermediary and retail asset managers. | ||
Wealth Managers | Wealth Managers | ||
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Finally, Alpha supports a range of other providers to the asset and wealth management industry, including software vendors and data providers. Engagements with these clients include new product development, market reviews and support responding to market requests for proposal. | Finally, Alpha supports a range of other providers to the asset and wealth management industry, including software vendors and data providers. Engagements with these clients include new product development, market reviews and support responding to market requests for proposal. | ||
Key strengths of the | Key strengths of the Group | ||
As a leading global consultancy provider to the asset and wealth management industry, the directors believe that Alpha is well-positioned for continued growth in a marketplace shaped by the primary market drivers of an underlying growth in AUM, rising cost pressures, regulatory change and continuing consolidation, all of which are underpinned by technological change in the asset and wealth management industry. The group’s approach is to create value for clients by leveraging its extensive industry knowledge, proprietary database, product expertise and application of technology and digital innovation to deliver a targeted service offering across most of the asset and wealth management value chain from portfolio management through sales, distribution and the middle and back office. This approach allows the group to help its clients improve key aspects of their business. | As a leading global consultancy provider to the asset and wealth management industry, the directors believe that Alpha is well-positioned for continued growth in a marketplace shaped by the primary market drivers of an underlying growth in AUM, rising cost pressures, regulatory change and continuing consolidation, all of which are underpinned by technological change in the asset and wealth management industry. The group’s approach is to create value for clients by leveraging its extensive industry knowledge, proprietary database, product expertise and application of technology and digital innovation to deliver a targeted service offering across most of the asset and wealth management value chain from portfolio management through sales, distribution and the middle and back office. This approach allows the group to help its clients improve key aspects of their business. | ||
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'''Focused industry proposition delivering true expertise''' – Alpha has developed specialised expertise and experience in the asset and wealth management industry. This industry focus enables the group’s professionals to provide offerings on a global basis with a comprehensive understanding of the market, business issues and relevant technologies, and ultimately deliver tailored solutions for each client. | '''Focused industry proposition delivering true expertise''' – Alpha has developed specialised expertise and experience in the asset and wealth management industry. This industry focus enables the group’s professionals to provide offerings on a global basis with a comprehensive understanding of the market, business issues and relevant technologies, and ultimately deliver tailored solutions for each client. | ||
'''Strong reputation and deep relationships with global clients''' – Alpha has served a large proportion of the world’s largest and most successful asset managers and wealth management companies, including | '''Strong reputation and deep relationships with global clients''' – Alpha has served a large proportion of the world’s largest and most successful asset managers and wealth management companies, including 17 of the 20 largest global asset managers by AUM and 60% of the top 50 as at 31 March 2017. | ||
'''Broad, diversified and expanding base of clients''' – The group’s business extends to delivering a range of product offerings to global asset managers, wealth managers, asset owners and third party administrators. Revenue is diversified across a growing client base with no single client accounting for more than 10% in the year ended 31 March | '''Broad, diversified and expanding base of clients''' – The group’s business extends to delivering a range of product offerings to global asset managers, wealth managers, asset owners and third party administrators. Revenue is diversified across a growing client base with no single client accounting for more than 10% in the year ended 31 March 2017. | ||
'''Intellectual property''' – The group combines industry leading consulting expertise with detailed proprietary benchmarking data developed since the creation of the group, which has enabled it to develop trusted, long term relationships with clients. This information is held by the company, preventing the company from becoming dependent on one particular individual or group of individuals. | '''Intellectual property''' – The group combines industry leading consulting expertise with detailed proprietary benchmarking data developed since the creation of the group, which has enabled it to develop trusted, long term relationships with clients. This information is held by the company, preventing the company from becoming dependent on one particular individual or group of individuals. | ||
'''Alpha’s people and culture''' – The group competes with the largest consultancy companies globally for talent, operating a business in which people are central to the delivery of its growth strategy. Alpha targets both graduates and experienced professionals and has developed a strong culture which attracts high calibre consultants and places people at the heart of the business. Further, Alpha has created an environment in which people are rewarded for both their own contribution and for the success of the business as a whole. The directors believe that Alpha’s reputation is key to attracting those talents. To develop and support high performance, the directors believe that the group has developed a rigorous recruitment process and comprehensive training and development plan, offers a market leading compensation package including profit share arrangements, and has a strong focus on employee wellbeing. This results in Alpha having attained what the directors believe to be an industry leading unmanaged consultant attrition rate of less than 5% in the year ended 31 March | '''Alpha’s people and culture''' – The group competes with the largest consultancy companies globally for talent, operating a business in which people are central to the delivery of its growth strategy. Alpha targets both graduates and experienced professionals and has developed a strong culture which attracts high calibre consultants and places people at the heart of the business. Further, Alpha has created an environment in which people are rewarded for both their own contribution and for the success of the business as a whole. The directors believe that Alpha’s reputation is key to attracting those talents. To develop and support high performance, the directors believe that the group has developed a rigorous recruitment process and comprehensive training and development plan, offers a market leading compensation package including profit share arrangements, and has a strong focus on employee wellbeing. This results in Alpha having attained what the directors believe to be an industry leading unmanaged consultant attrition rate of less than 5% in the year ended 31 March 2017. | ||
'''Strong track record of organic growth''' – Alpha has delivered a consistent record of growth with a revenue CAGR of | '''Strong track record of organic growth''' – Alpha has delivered a consistent record of growth with a revenue CAGR of 37% from £6.71 million for the year ended 31 March 2011 to £43.56 million for the year ended 31 March 2017. This significant revenue growth has been accompanied by a CAGR in adjusted EBITDA of 47% over the same period, reaching £8.55 million for the year ended 31 March 2017. | ||
'''Proven, experienced high-calibre management team''' – The group benefits from a high-calibre senior management team with substantial and diverse experience, led by Euan Fraser, the group’s Chief Executive Officer. Together, the senior management team has driven the growth and strong financial performance of the business over the past several years and has a proven track record of delivering results. | '''Proven, experienced high-calibre management team''' – The group benefits from a high-calibre senior management team with substantial and diverse experience, led by Euan Fraser, the group’s Chief Executive Officer. Together, the senior management team has driven the growth and strong financial performance of the business over the past several years and has a proven track record of delivering results. | ||
Building on the significant growth already achieved in recent years, the directors believe that the group has the potential to capture a significantly larger market share of its chosen markets. The directors believe that the competitive advantages as described above position the group to deliver profitable growth. | Building on the significant growth already achieved in recent years, the directors believe that the group has the potential to capture a significantly larger market share of its chosen markets. The directors believe that the competitive advantages as described above position the group to deliver profitable growth. | ||
'''Strong balance sheet?''' | '''Strong balance sheet?''' | ||
=== Which are the main competitors of the product? === | === Which are the main competitors of the product? === | ||
A key way to determine an offering’s closest competitors is by looking at other offerings that are targeting the same or similar target audience (i.e. financial markets | A key way to determine an offering’s closest competitors is by looking at other offerings that are targeting the same or similar target audience (i.e. financial markets companies) and providing or aiming to provide the same core benefit (i.e. more/maximum business profits, in particular financial markets consultancy), and then ranking the offerings in terms of the total amount of time spent using and/or money spent purchasing the offerings. With that said, we view that the closest competitor of the Alpha FMC offering(s) is Accenture. A detailed comparison between Alpha FMC and its main competitors are shown in the table below. | ||
Alpha operates in a competitive global market and competes with several organisations that offer services similar to those offered by the group. Competitors include the advisory practices of major accounting firms, global consulting firms and boutique consulting businesses. | |||
Alpha operates in a competitive global market and competes with several organisations that offer services similar to those offered by the group. Competitors include the advisory practices of major accounting firms, global consulting firms and boutique consulting businesses. | |||
The group has been able to successfully compete against these firms by providing specialist expertise to the asset and wealth management industry, and by consistently delivering a high quality service which attracts repeat business and fosters long term relationships. Against the boutique consulting businesses, Alpha is able to differentiate itself through its global offering, relationships with the largest fund managers and reputation for high quality and efficient service. Against the global consulting firms, the group differentiates itself with a specialised industry offering and tailored client solutions. Alpha is able to set itself apart from the advisory practices of major accounting firms through its specialist sector focus and by deploying highly experienced industry consultants to client engagements, who have demonstrable track records of delivering complex projects. This is made possible through the group’s ability to attract and retain high calibre consultants. | The group has been able to successfully compete against these firms by providing specialist expertise to the asset and wealth management industry, and by consistently delivering a high quality service which attracts repeat business and fosters long term relationships. Against the boutique consulting businesses, Alpha is able to differentiate itself through its global offering, relationships with the largest fund managers and reputation for high quality and efficient service. Against the global consulting firms, the group differentiates itself with a specialised industry offering and tailored client solutions. Alpha is able to set itself apart from the advisory practices of major accounting firms through its specialist sector focus and by deploying highly experienced industry consultants to client engagements, who have demonstrable track records of delivering complex projects. This is made possible through the group’s ability to attract and retain high calibre consultants. | ||
'''How does Alpha's fees compare to its peers? What's the financial markets team size of the peers?''' | |||
=== What is the main way that the company expects to make money? === | === What is the main way that the company expects to make money? === | ||
=== What’s the size of the company target market? === | === What’s the size of the company target market? === | ||
===Total Addressable Market=== | ===Total Addressable Market=== | ||
Here, the total addressable market (TAM) is defined as the global | Here, the total addressable market (TAM) is defined as the global consultancy market, and based on a number of assumptions, it is estimated that the size of the market as of today (23rd January 2023), in terms of revenue, is $590 billion<ref>0.61% of global GDP.</ref>. | ||
===Serviceable Available Market=== | |||
The serviceable available market (SAM) is defined as the global asset management, wealth management and insurance consultancy market, and based on a number of assumptions, it is estimated that the size of the market as of today (23rd January 2023), in terms of revenue, is $59 billion<ref>=10% of the global consultancy market.</ref>. | |||
The asset and wealth management industry has grown significantly since 2008, with global aggregate assets under management standing at approximately $69.1 trillion at the end of 2016, compared to $38.5 trillion at the end of 2008. | |||
Whilst overall AUM is growing, the asset and wealth management industry is experiencing challenges stemming from regulatory changes and cost pressures from the regulators and end clients. These factors are driving an increased focus by asset and wealth managers on improving systems, data quality and operational processes, in order to gain a competitive advantage, generate above average returns and reduce costs. This in turn has helped drive demand for the management consulting services provided to the asset and wealth management industry, across the spectrum of front, middle and back office functions. | |||
The industry is subject to a wide range of regulatory and risk management considerations, which the directors believe will continue to drive growth in consulting services. In addition to the ever more demanding regulatory environment, the industry is having to react to requests from institutional and retail customers for greater transparency in reporting, engagement and accountability, which in turn is driving a growth in demand for more effective data systems and processes. | |||
The pressure on margins within the asset and wealth management industry has also resulted in significant consolidation in recent years, as fund managers seek to increase assets under management, drive synergies and ultimately generate better returns through mergers and acquisitions (“M&A”). | |||
The value of global M&A deals completed in the sector totalled approximately $34.9 billion in 2015 and $71.3 billion in 2016, with many market commentators expecting continued consolidation through M&A in the asset and wealth management industry in the near future. This has created substantial opportunities and areas of growth for Alpha as it continues to provide M&A integration, operational and outsourcing consultancy services to increasingly larger and more complex fund managers. | |||
===Serviceable Obtainable Market=== | |||
Here, the serviceable obtainable market (SOM) is defined as the United Kingdom asset management, wealth management and insurance consultancy market, and based on a number of assumptions, it is estimated that the size of the market as of today (23rd January 2023), in terms of revenue, is $2.17 billion<ref>= UK GDP x consultancy as a proportion of GDP x financial services as a proportion of GDP | |||
= $3.131 trillion x 0.84% x 8.3%.</ref>. | |||
=== What are the main achievements of the company? === | === What are the main achievements of the company? === | ||
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* The company has the largest dedicated team in the industry, with in excess of 900 consultants, globally. | * The company has the largest dedicated team in the industry, with in excess of 900 consultants, globally. | ||
* It operates from 16 client-facing offices, across the United Kingdom, North America, Europe and APAC. | * It operates from 16 client-facing offices, across the United Kingdom, North America, Europe and APAC. | ||
=== What's the business strategy of the company? === | === What's the business strategy of the company? === | ||
The group’s strategy is to continue to grow in both existing and new jurisdictions | The group’s strategy is to continue to grow in both existing and new jurisdictions. The group has a strong track record of EBITDA growth and intends to further grow its business in the following ways: | ||
'''Expand existing services in existing markets''' – The group currently serves clients in multiple countries and the directors consider that there is substantial scope to grow within these markets. In addition to winning new clients, the group also aims to grow by extending the services delivered to existing clients, or by serving other client group entities. | '''Expand existing services in existing markets''' – The group currently serves clients in multiple countries and the directors consider that there is substantial scope to grow within these markets. In addition to winning new clients, the group also aims to grow by extending the services delivered to existing clients, or by serving other client group entities. | ||
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=== Who are the key members of the team? === | === Who are the key members of the team? === | ||
The | The company is led by the person who believes in the mission of the company the most: the creator of the company mission (i.e. ccc). Between them, the members of the team have helped companies raise a significant amount of finance and build some of the world's most renowned digital platforms. | ||
==== Executive ==== | ==== Executive ==== | ||
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Euan keeps the skills to support and deliver the Group’s strategy up to date through his role as Chief Executive Officer of a global consulting firm operating within the financial services sector. In this role, Euan has to understand and manage the interests of a range of stakeholders, including employees, clients, competitors and investors. Euan maintains a number of strong industry relationships that involve sharing of knowledge and perspectives. | Euan keeps the skills to support and deliver the Group’s strategy up to date through his role as Chief Executive Officer of a global consulting firm operating within the financial services sector. In this role, Euan has to understand and manage the interests of a range of stakeholders, including employees, clients, competitors and investors. Euan maintains a number of strong industry relationships that involve sharing of knowledge and perspectives. | ||
===== Global Chief Financial Officer: John Paton ===== | ===== Global Chief Financial Officer: John Paton ===== | ||
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=== How much does the company expect to make over the next five years? === | === How much does the company expect to make over the next five years? === | ||
*Most recent full-year results | |||
In the 12-months period ended 31st March 2022, revenue increased by 61.1% to £158.0 million (FY21: £98.1 million), driven almost entirely by net fee income (99.9%) | **Profit and loss | ||
***Non-adjusted | |||
****In the 12-months period ended 31st March 2022, revenue increased by 61.1% to £158.0 million (FY21: £98.1 million), driven almost entirely by net fee income (99.9%). | |||
****Gross profit increased by 70.4% to 59.4 million (FY21: 34.8 million). | |||
****Profit before tax increased by 65.9% to £14.9 million (FY21: £9.0 million). | |||
****Basic earnings per share increased by 33.7% to 7.69p (FY21: 5.75p). | |||
***Adjusted | |||
****On a like-for-like basis (i.e. excluding the acquisition of Lionpoint), revenue increased by 31.3% to £ccc million (FY22: £ccc million). | |||
****Adjusted EBITDA increased by 56.0% to £33.9 million (FY21: £21.7 million). | |||
****Adjusted profit before tax increased by 62.2% to £31.8 million (FY21: £19.6 million). | |||
****Adjusted earnings per share increased by 43.9% to 21.46p (FY21: 14.91p) | |||
** Balance sheet | |||
***Net current assets | |||
****Net current assets increased by 21.5% to £27.2 million (FY21: £22.4 million). | |||
***Cash | |||
****Cash increased by 86.7% to £63.5 million (FY21: £34.0 million). | |||
***Net assets | |||
****Net assets increased by 40.7% to £132.7 million (FY21: £94.4 million). | |||
***Debt | |||
****No debt. | |||
***Net debt | |||
****Net cash increased by 86.7% to £63.5 million (FY21: £34.0 million). | |||
**Cash flow | |||
***CFO | |||
****Non-adjusted | |||
*****Net cash generated from operating activities increased by 59.3% to £33.5 million (FY21: £21.0 million). | |||
****Adjusted | |||
*****Adjusted cash generated from operating activities ccc by ccc% to £ccc million (FY21: £ccc million). | |||
***CIO | |||
****Net cash used from investing activities increased by 8x to £24.5 million (FY21: £2.9 million). | |||
***CFO | |||
****Net cash from financing activities switched to using £20.0 million (FY21: £8.5 million). | |||
****Final dividend increased by 55% to 7.50p per share (FY21: 4.85p). | |||
*Most recent interims | |||
**Profit and loss | |||
***Non-adjusted | |||
****In the six month period ended 30th September 2022, revenue increased by 57.3% to £107.6 million (H1 FY22: £68.4 million), driven almost entirely by higher net fee income (net fee income accounts for 99.4% of revenue), in particular from the North America region (the North America region accounts for 41.4% of net fee income). Net fee income jumped by 56.5% to £107.0 million (H1 FY22: £68.4 million). | |||
****The number of client relationships increased by 19% to 787 clients (H1 22: 662), boosted by both new clients wins and client retention. | |||
****Gross profit increased by 45.3% to £38.4 million (H1 FY22: £26.5 million), equating to a gross profit margin of 35.9% (H1 FY22: ccc%). | |||
****The number of consultants increased by 40.4% to 921 consultants (H1 FY22: 656 consultants), driven by client demand. The director headcount increased by 11% to 97 directors (H1 FY22: 88 directors). | |||
****Profit before tax increased by 235.6% to £14.2 million (H1 22: £4.2 million). | |||
****Basic earnings per share increased by 10x to 9.10p (H1 22: 0.87p). | |||
***Adjusted | |||
****On a like-for-like basis (i.e. excluding the acquisition of Lionpoint), revenue increased by £ccc million (H1 22: £ccc million). Net fee income increased by 45.3% to £ccc million (H1 22: £ccc million). | |||
****Adjusted EBITDA increased by 45.6% to £22.5 million (H1 FY22: £15.4 million), equating to a margin of 21.5% (H1 FY22: 22.6%). | |||
****Adjusted profit before tax increased by 47.2% to £21.3 million (H1 22: £14.4 million). | |||
****Adjusted earnings per share increased by 43.0% to 14.09p (H1 22: 9.85p). | |||
** Balance sheet | |||
***Net current assets | |||
****Net current assets decreased by 32.0% to £18.5 million (H2 22: £27.2 million). | |||
***Cash | |||
****Cash decreased by 24.7% to £47.8 million (H2 22: £63.5 million). | |||
***Net assets | |||
****Net assets increased by 11.4% to £147.9 million (H2 22: £132.7 million). | |||
***Debt | |||
****Debt increased to £7.5 million (H2 22: nil). The company has access to a £20.0m revolving credit facility ("RCF"), enabling the company to further improve its liquidity if required. | |||
***Net debt | |||
****Net cash decreased by 36.5% to £40.3 million (H2 22: £63.5 million). | |||
**Cash flow | |||
*** CFO | |||
****Non-adjusted | |||
*****Net cash generated from operating activities decreased by 63.3% to £2.2 million (H1 FY22: £6.0 million) as the improved profits were outweighed by higher working capital requirements. | |||
****Adjusted | |||
*****Adjusted cash generated from operating activities decreased by 50.6% to £4.2 million (H1 FY22: £8.5 million). | |||
***CIO | |||
****Net cash used from investing activities decreased by 10.4% to £21.5 million (H1 FY22: £24.0 million). A significant portion of the cash (96%) was used to pay for the (Lionpoint) acquisition. | |||
***CFO | |||
****Net cash from financing activities switched to using £3.3 million (H1 FY22: £23.8 million), mainly because no new shares were issued during the period. | |||
****Interim dividend increased by 27.6% to 3.70p per share (H1 FY22: 2.90p). | |||
**Other | |||
***The company added that in-line with its strategic objectives, it will continue to focus on growing the business through the deepening of its service offering and through geographic expansion. | |||
***The company added that its confident in the outlook of the second half of the current financial year and beyond. | |||
==== What are the financials? ==== | |||
{| class="wikitable" | |||
|+Financial performance | |||
!Year end 31 March (£000's) | |||
==== What are the financials? ==== | |||
{| class="wikitable" | |||
|+Financial performance | |||
!Year end 31 March (£000's) | |||
!2019 | !2019 | ||
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As with any investment, investing in Alpha FMC carries a level of risk. Overall, based on the Alpha FMC's adjusted beta (i.e. 1.139)<ref>Research shows that an investment has two main types of risks: 1) non-systematic and 2) systematic. Systematic risk is the risk related to the overall market, and non-systematic risk is the risk that's specific to an individual investment. Evidence shows that taking on non-systematic risk is inefficient, and it's, therefore, best to eliminate it; and in most cases, elimination is fairy easy to do [by holding a diversified portfolio of investments (i.e. around 15 investments)]. Accordingly, when assessing the riskiness of an investment, it’s best to look at the systematic risk only (i.e. ignore the non-systematic risk). A key measure of systematic risk is beta, and a main way to determine the riskiness of an investment is to compare the beta of the investment with the beta of the market, which is 1. For example, Supply@ME Capital's adjusted beta (5 years, monthly data) is 4.61, and is, accordingly, 561% above the market beta (of 1); assuming that a 'high' level of riskiness is 50% or more above the market beta, then the riskiness of investing in Supply@ME Captial is considered to be 'high' (561%>50%). For estimating an asset's beta, in terms of time period, and frequency of observations, the most common choice is five years of monthly data, yielding 60 observations. One study of U.S. stocks found support for five years of monthly data over alternatives. An argument can be made that the 2 years, weekly data can be especially appropriate in fast growing markets. The beta value in a future period has been found to be on average closer to the mean value of 1.0, the beta of an average-systematic-risk security, than to the value of the raw beta. Because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.</ref>, the degree of risk associated with an investment in Alpha FMC is 'medium'. | As with any investment, investing in Alpha FMC carries a level of risk. Overall, based on the Alpha FMC's adjusted beta (i.e. 1.139)<ref>Research shows that an investment has two main types of risks: 1) non-systematic and 2) systematic. Systematic risk is the risk related to the overall market, and non-systematic risk is the risk that's specific to an individual investment. Evidence shows that taking on non-systematic risk is inefficient, and it's, therefore, best to eliminate it; and in most cases, elimination is fairy easy to do [by holding a diversified portfolio of investments (i.e. around 15 investments)]. Accordingly, when assessing the riskiness of an investment, it’s best to look at the systematic risk only (i.e. ignore the non-systematic risk). A key measure of systematic risk is beta, and a main way to determine the riskiness of an investment is to compare the beta of the investment with the beta of the market, which is 1. For example, Supply@ME Capital's adjusted beta (5 years, monthly data) is 4.61, and is, accordingly, 561% above the market beta (of 1); assuming that a 'high' level of riskiness is 50% or more above the market beta, then the riskiness of investing in Supply@ME Captial is considered to be 'high' (561%>50%). For estimating an asset's beta, in terms of time period, and frequency of observations, the most common choice is five years of monthly data, yielding 60 observations. One study of U.S. stocks found support for five years of monthly data over alternatives. An argument can be made that the 2 years, weekly data can be especially appropriate in fast growing markets. The beta value in a future period has been found to be on average closer to the mean value of 1.0, the beta of an average-systematic-risk security, than to the value of the raw beta. Because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.</ref>, the degree of risk associated with an investment in Alpha FMC is 'medium'. | ||
Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more | Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. We note that the company in its current state was only really formed (following a reverse takeover) on 27th March 2020<ref>Officially, the company was formed on 1st March 2000 (i.e. almost 23 years ago).</ref>, and, therefore, the numbers of available data observations is less than what's typically used in the five years of monthly data beta calculation (i.e. 33 observations vs. 60 observations). The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more accurately predicts a future beta. In addition, here, we have assumed that for an investment to be considered 'medium' risk, it must have a beta value of between 0.5 and 1.5. Further information about the beta ratings can be found in the appendix section of this report. | ||
The key risks can be found below. For us, currently, the biggest risk to the valuation of the company relates to the company's ability (and willingness) to take the appropriate risk to maintain the growth of the business. | The key risks can be found below. For us, currently, the biggest risk to the valuation of the company relates to the company's ability (and willingness) to take the appropriate risk to maintain the growth of the business. | ||
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|Which type of DCF model do you want to use? | |Which type of DCF model do you want to use? | ||
|Free cash flow | |Free cash flow | ||
|While Alpha has paid a dividend every year since its public listing (in 2017) | |While Alpha has paid a dividend every year since its public listing (in 2017), the growth rate of the dividend varies materially; accordingly, we suggest valuing the business using the free cash flow valuation method (rather than the dividend discount model). Nevertheless, for completeness purposes, separately, the valuation of the company is also estimated using the dividend discount model (the valuation based on the dividend discount model can be found in the appendix of this report). | ||
|- | |- | ||
|Which financial forecasts to use? | |Which financial forecasts to use? | ||
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|- | |- | ||
|Risk-free rate (%) | |Risk-free rate (%) | ||
|3. | |3.488% | ||
|Here, the risk free rate is the US 30 year treasury bond, and is calculated as at | |Here, the risk free rate is the US 30 year treasury bond, and is calculated as at 16th December 2022. Research suggests that for the risk-free rate, it's best to use one that has the same or similar maturity to the estimated remaining lifespan of the company. Here, we have assumed that the estimated lifespan of the company is 50 years, so we have used the longest maturity, which is 30 years. | ||
|- | |- | ||
|Beta | |Beta | ||
|1.139 | |1.139 | ||
|Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more | |Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more accurately predicts a future beta. | ||
|- | |- | ||
|Equity risk premium (%) | |Equity risk premium (%) | ||
| | |5.26 | ||
|Research suggests that for the region of equity risk premium, it's best to use one that is the same or similar to the region of the beta market portfolio. Here, the region of the beta market portfolio is the world/global, so we have used the world/global region for the equity risk premium | |Here, the equity risk premium is in relation to the global region, and is calculated as at 1st January 2022. Research suggests that for the region of equity risk premium, it's best to use one that is the same or similar to the region of the beta market portfolio. Here, the region of the beta market portfolio is the world/global, so we have used the world/global region for the equity risk premium. | ||
|- | |- | ||
|Cost of equity (%) | |Cost of equity (%) | ||
| | |9.479% | ||
|Cost of equity = Risk-free rate + Beta x Equity risk premium. | |Cost of equity = Risk-free rate + Beta x Equity risk premium. | ||
|} | |} | ||
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|Which type of multiple do you want to use? | |Which type of multiple do you want to use? | ||
|Price/earnings to growth | |Price/earnings to growth | ||
| | |Given the relatively low amount of leverage used in consulting businesses and Alpha's significant amount of (positive) earnings and comparatively high amount of recurring revenue, we suggest valuing the company using the price/earnings ratio. However, we feel that to take into account the different business lifecycle stages of its peers (and, therefore, the different growth stages of its peers), the most suitable valuation multiple to use is the price/earnings to growth multiple (or the PEG multiple, for short), rather than the price/earnings multiple. | ||
|- | |- | ||
|In regards to the PEG multiple, for the earnings figure, which year to you want to use? | |In regards to the PEG multiple, for the earnings figure, which year to you want to use? | ||
|Year 1 | |Year 1 | ||
|Research suggests that when using the relative valuation approach, it's best to use a time period of 12 months or less. Accordingly, for the | |Research suggests that when using the relative valuation approach, it's best to use a time period of 12 months or less. Accordingly, for the sales figure, we suggest using Year 1, which is 20 pence per share. | ||
|- | |- | ||
|In regards to the PEG multiple, for the earnings growth figure, which year(s) do you want to use? | |In regards to the PEG multiple, for the earnings growth figure, which year(s) do you want to use? | ||
|Year 2 to 4, from now | |Year 2 to 4, from now | ||
|We suggest that for the | |We suggest that for the sales growth figure, it's best to use Year 2 to 4, which equates to a compound annual growth rate (CAGR) of 30%. | ||
|- | |- | ||
|In regards to the PEG multiple, what multiple figure do you want to use? | |In regards to the PEG multiple, what multiple figure do you want to use? | ||
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|} | |} | ||
{| class="wikitable" | {| class="wikitable" | ||
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!Primary exchange | !Primary exchange | ||
!Adjusted EV/sales | !Adjusted EV/sales | ||
! | ! | ||
! | ! | ||
! | ! | ||
!Sales growth rate | !Sales growth rate | ||
!Adjusted beta | !Adjusted beta | ||
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*These trends represent a strong tailwind for the Group and are steadily increasing the relevance and value of its proposition: to provide the best specialist consultancy services for clients wherever in the world they need us. | *These trends represent a strong tailwind for the Group and are steadily increasing the relevance and value of its proposition: to provide the best specialist consultancy services for clients wherever in the world they need us. | ||
*The group’s strategic aim to be recognised as the leading global consultancy to the asset management, wealth management and insurance industries. | *The group’s strategic aim to be recognised as the leading global consultancy to the asset management, wealth management and insurance industries. | ||