Sunday 10 March 2019 11:08 am Interactive Investor Talk

Alfa Financial Software up 24 per cent and could go higher

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By Graeme Evans from interactive investor 

Worth only a fraction of its £1bn peak, Alfa Financial is seriously undervalued, says this pro investor.

Since taking the tech sector by storm in 2017 following its near-£1 billion IPO, days like today haven't come around too often for Alfa Financial Software (LSE:ALFA).

A year ago, its shares crashed almost 20 per cent as maiden results from the supplier of software to the asset finance industry burst the market's initial euphoria. The former FTSE 250 stock, which began life at 325p in the tech sector's biggest IPO for two years in May 2017, reversed from a peak of 548p in December 2017 to just 101p some 12 months later.

Today's second set of annual results drew a much more positive response, with shares up 24 per cent to 153p amid signs that the company is addressing the challenges of 2018, when Alfa saw a slower than expected conversion rate of its sales pipeline into contracted customers.

Combined with a delay to one of its major software implementations, adjusted earnings per share dropped 45 per cent to 6.1p in 2018. Revenues were down 19 per cent to £71 million, but this masks a much better performance in the second half after a 16% increase compared with the first half.

Analysts at Numis Securities described the results performance as reassuring and a step in the right direction, adding that adjusted profits across a number of measures were between 10 per cent and 15 per cent better than forecast.

Numis, which has a price target of 200p, said Alfa was currently trading at a 30-35 per cent discount to its UK technology peers. The broker said:

"We believe this discount will narrow considerably as investors become more confident on the group's ability to win new contracts and grow again."

Source: TradingView (*) Past performance is not a guide to future performance

Alfa serves a global multi-billion dollar market, with its Alfa Systems technology platform at the heart of some of the world's largest asset finance companies. It has customers in more than 25 countries, including in Asia and North America.

Numis added:

"Despite the revenue pause, the group's margins remain one of the best in the sector (32% in 2018) and its strong balance sheet provides it with additional support and flexibility."

Alfa, which launched as CHP Consulting in 1990 before changing its name in 2016, is strongly cash generative with net cash up 43 per cent to almost £45 million in today's results.

Chief executive Andrew Denton believes a number of organisational changes, such as combining the sales and commercial teams, will strengthen the business going forward. He is also hopeful that the major implementation project put on hold last year could restart later in 2019.

He said: “Moving into 2019, our focus remains on converting sales opportunities to contracted customers.

"We are currently progressing contractual discussions with a new European customer and planning a second phase implementation for an existing multi-national customer."

The stock jumped more than 30 per cent on its first day of trading in May 2017, giving it a valuation at the time of more than £1 billion.

*Horizontal lines on charts represent levels of previous technical support and resistance.

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