The first full year figures from Alfa Financial Software (ALFA) since its stock market debut in June 2017 are bang in line with expectations. The numbers are decent yet the share price has fallen nearly 20% off the back of the figures to 390p as investors worry about the timing of new contracts.
‘Alfa continues to see a strong and diverse pipeline of opportunities which underpin the board's confidence through 2018, with revenue growth weighted to the second half of the year as the full benefit of recent wins is felt,’ says the FTSE 250 firm.
I’ve bolded the bit that investors have clearly focused on.
Reading between the lines, several new large contract implementations are expected to take longer than first thought, which could put the squeeze on profits in 2018.
NICHE SOFTWARE EXPERT
Alfa provides an enterprise system for the asset and consumer finance industry. The platform provides new business, agreement management functionality as well as workflow and analytics capabilities.
Global clients include Barclays (BARC), Bank of America and Commonwealth Bank of Australia, plus the finance arms of manufacturing giants like Mercedes-Benz, Siemens and Toyota.
SOLID 2017 RESULTS
The company’s performance through 2017 was very good. Adjusted EBIT (earnings before interest and tax) grew 26% to £41.2m for a 46.9% margin.
EBIT is effectively operating profit after all normal operating expenses are stripped out, apart from interest and tax.
Revenue increased by 20% to £87.8m or by 9% to £86.1m at constant currencies. Adjusted EBIT grew by 17% to £39.6m at constant currencies. Those are impressive growth rates for a company on an enterprise value of £1.2bn (after today’s share price slump).
The performance was largely driven by the delivery of five large software implementations, which moved into post-implementation phase.
LEGACY REFRESH OPPORTUNITY
The scale of the opportunity is clear with so many legacy and in-house built IT systems struggling to match digital transformation demands. There are also stiff regulatory challenges to overcome.
Alfa’s single platform, cloud-based approach makes transition relatively easy for clients to a 21st Century digital-ready, outsourced IT alternative.
We believe the market has over-reacted to the latest set of results. Earnings forecasts have been downgraded by a much smaller amount than the share price decline. For example, Numis trims its EBIT forecasts by less than 5% for 2018.
It goes to show the risks for businesses whose shares trade on premium ratings, even if they are quality companies.
Before today’s announcement Alfa’s 2018 price to earnings multiple was about 39. That’s come down to nearer 33 now.
