Editing Alpha Financial Markets Consulting plc
The edit can be undone. Please check the comparison below to verify that this is what you want to do, and then publish the changes below to finish undoing the edit.
Latest revision | Your text | ||
Line 116: | Line 116: | ||
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 | ||
Line 177: | Line 177: | ||
=== 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=== | ===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 $ | 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 key structural drivers in the industry are as follows: | The key structural drivers in the industry are as follows: | ||
Line 205: | Line 196: | ||
# 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 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. | ||
# '''Consolidation.''' 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. 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. | # '''Consolidation.''' 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. 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? === | ||
Line 1,544: | Line 1,540: | ||
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/most 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. | 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/most 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. | ||
Line 1,783: | Line 1,779: | ||
|- | |- | ||
|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 | ||
Line 1,791: | Line 1,787: | ||
|- | |- | ||
|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. | ||
|} | |} | ||
Line 1,819: | Line 1,815: | ||
|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 | ||
|Mainly given the relatively low amount of fixed capital expenditure (as a proportion of revenue) of companies within the consultancy industry (for example, currently, Alpha's fixed capital expenditure as a proportion of revenue is around 0.5%), 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 (earnings) growth multiple (or the PEG multiple, for short), rather than the price/earnings multiple. Another multiple which we think it's worth looking at is the ( | |Mainly given the relatively low amount of fixed capital expenditure (as a proportion of revenue) of companies within the consultancy industry (for example, currently, Alpha's fixed capital expenditure as a proportion of revenue is around 0.5%), 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 (earnings) growth multiple (or the PEG multiple, for short), rather than the price/earnings multiple. Another multiple which we think it's worth looking at is the (revenue) growth-adjusted EV/sales, mainly because the multiple takes into account the different leverage levels of the peers (whereas the PEG does not, at least not directly; one is able to argue that the leverage levels are reflected indirectly in the earnings growth rates). | ||
|- | |- | ||
|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? | ||
Line 1,847: | Line 1,843: | ||
|} | |} | ||
{| class="wikitable" | {| class="wikitable" |