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. | |||
* The company's flagship offering is the provision of consultancy/advisory services. What makes the consultancy 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 14% above the market (1.14 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. | |||
== 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 to be 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 provision of consultancy/advisory services. What makes the consultancy offering unique is that it's provided by the largest | The solution is the provision of consultancy/advisory services. What makes the consultancy 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. | ||
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 group | Key strengths of the group | ||
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'''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 2022. | '''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 2022. | ||
'''Strong track record of organic growth''' – Alpha has delivered a consistent record of growth with a revenue CAGR of 33% from £6.71 million for the year ended 31 March 2011 to £158.0 million for the year ended 31 March 2022. This significant revenue growth has been accompanied by a CAGR in adjusted EBITDA | '''Strong track record of organic growth''' – Alpha has delivered a consistent record of growth with a revenue CAGR of 33% from £6.71 million for the year ended 31 March 2011 to £158.0 million for the year ended 31 March 2022. This significant revenue growth has been accompanied by a CAGR in adjusted EBITDA of 40% over the same period, reaching £33,87 million for the year ended 31 March 2022. | ||
'''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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=== 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 ==== | ==== 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% | 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), equating to a two percentage point improvement in the profit margin, to 37.59% (FY21: 35.47%). Profit before tax increased by 65.9% to £14.9 million (FY21: £9.0 million), equating to a 26 basis point improvement in the profit margin, to 9.43% (FY21: 9.17%). Basic earnings per share increased by 33.7% to 7.69p (FY21: 5.75p). | ||
On a like-for-like basis (i.e. excluding the acquisition of Lionpoint), revenue increased by 31.3% to | 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). | ||
In relation to the financial position of the company, net current assets increased by 21.5% to £27.2 million (FY21: £22.4 million) | In relation to the financial position of the company, net current assets increased by 21.5% to £27.2 million (FY21: £22.4 million). Cash increased by 86.7% to £63.5 million (FY21: £34.0 million). Net assets increased by 40.7% to £132.7 million (FY21: £94.4 million). No debt. Net cash increased by 86.7% to £63.5 million (FY21: £34.0 million). | ||
Net cash generated from operating activities increased by 59.3% to £33.5 million (FY21: £21.0 million). Net cash used from investing activities increased by 8x to £24.5 million (FY21: £2.9 million). 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). | |||
On a like-for-like basis (i.e. excluding the acquisition of Lionpoint), adjusted cash generated from operating activities | On a like-for-like basis (i.e. excluding the acquisition of Lionpoint), adjusted cash generated from operating activities ccc by ccc% to £ccc million (FY21: £ccc million). | ||
==== Most recent interims ==== | ==== Most recent interims ==== | ||
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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 three percentage point decrease in the gross profit margin, to 35.7% (H1 FY22: 38.7%). The decrease in the margin is mainly due to higher consultant day rates. 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), equating to a seven percentage point improvement in the profit margin, to 13.20% (H1 FY22: 6.14%). Basic earnings per share increased by 10x to 9.10p (H1 22: 0.87p). | 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 three percentage point decrease in the gross profit margin, to 35.7% (H1 FY22: 38.7%). The decrease in the margin is mainly due to higher consultant day rates. 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), equating to a seven percentage point improvement in the profit margin, to 13.20% (H1 FY22: 6.14%). Basic earnings per share increased by 10x to 9.10p (H1 22: 0.87p). | ||
On a like-for-like basis (i.e. excluding the acquisition of Lionpoint), | 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 1 percentage point decease in the margin, to 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). | ||
Net current assets decreased by 32.0% to £18.5 million (H2 22: £27.2 million). Cash decreased by 24.7% to £47.8 million (H2 22: £63.5 million). Net assets increased by 11.4% to £147.9 million (H2 22: £132.7 million). 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 cash decreased by 36.5% to £40.3 million (H2 22: £63.5 million). | |||
Net | 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. 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. 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). | ||
Adjusted cash generated from operating activities decreased by 50.6% to £4.2 million (H1 FY22: £8.5 million). | |||
==== Since interims ==== | ==== Since interims ==== | ||
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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" | ||
Line 1,890: | Line 1,878: | ||
!Primary exchange | !Primary exchange | ||
!Adjusted EV/sales | !Adjusted EV/sales | ||
! | ! | ||
! | ! | ||
! | ! | ||
!Sales growth rate | !Sales growth rate | ||
!Adjusted beta | !Adjusted beta | ||
Line 3,161: | Line 3,149: | ||
*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. | ||