Buying Alpha FX Group PLC (LON:AFX)

Here's an interesting stock. Unlike my other recent new positions, Alpha FX is a super-growth share (albeit off a small base). In 2018 revenue leaped 73% to $23.5 million (all organic), underlying operating profit bounced 48% to $10.0 million and underlying earnings-per-share popped 30% to 22.7 pence. And these aren't the Charlie Munger variety of adjusted profit figures either.

Alpha provides FX hedge consulting to SMEs. It charges no fixed or upfront fee, instead taking a transaction margin. Clients get free access to Alpha's proprietary and evolving software as well as guidance on managing currency risk. The big bad banks (who own the large enterprise market for FX services) charge a hefty retainer for a similar package, making the whole exercise a waste of time for smaller customers - until now.

In the 2018 Annual Report, management made a song and dance about culture, customer service and employees. Reading it made me glow, or purr, or something. 50% of employees are "partners" owning a combined 51% of the company. Staff incentives are aimed at developing long-term client relationships. For example, the company does not implement revenue targets for each client as this leads to "churn and burn" and that is not what Alpha FX is about! There is a flat hierarchy where the bigwigs, newbies and everyone in between sit together and tell it like it is.

I can believe it, the financials sing to me. The only thing making me a little uneasy is cash flow. It can be a bit up and down because of Alpha's exposure to financial instruments. Alpha immediately matches an incoming customer order with a corresponding trade via one of several counterparties so market risk is curtailed. The company provides limited hedge collateral for customers as a nicety and this sucks some working capital out of the business. The result is cash lags profits during growth periods, which I can cope with provided return on equity remains high (currently 21.4%).

The stock trades on an alpine historical price-to-earnings (PE) multiple of 38.7, but with any luck that should come tumbling down to about 30 this year. The company estimates it has so far captured less than 1% of the UK market and has bold foreign plans. If, as I suspect, Alpha really does have a better culture and customer proposition than the competition then the future is Orange (what?). Banks are not known for their ability to transform themselves, so I reckon Alpha should be able to retain such comparative benefits.

These notes are just a start, more investigation lies ahead. My discoveries so far have persuaded me to add a bit of Alpha FX to the UK Portfolio. I am hoping that my gentlemanly colleague approves of this purchase, he is a master of this domain.

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