With the markets having been weak, particularly on the AIM, I haven’t exactly been surprised to see shares in AFM fall back in recent months.
That said, the retrace has been pretty sharp and overdone in my view, where no doubt some had been expecting the company to warn on the full year guidance.
Thankfully, an update to the market yesterday morning made for reassuring reading with AFM expecting to deliver in-line with the market expectations, despite having seen a more harsh backdrop.
Although the shares rallied yesterday by 3% to close at £3.17p they continue to look very good value to me, hence I continue to hold and added a few more.
Despite understandable economic headwinds and a more competitive landscape, AFM should deliver decent numbers for full year 20224, which according to broker Investec will see revenue coming in at £244.4m.
This in turn should provide for EBITDA of £48.8m with normalised pre-tax profits at £46.3m giving EPS of 26p.
The latter sees the stock trading today on a PE of 12, which looks far from expensive, even in these bearish times, particularly given AFM has attractive ongoing growth potential.
It also has the added attraction of a progressive dividend policy that will yield circa 5% based on the 15.6p per share total payment that has been pencilled in for the full year, which is something of a rarity for those companies concentrating on driving the growth.
Admittedly, the first half has been tough and there will certainly be a second half weighting to the numbers, but given its track record there is no reason to doubt that it will deliver, particularly in light of the update today.
Importantly, conditions or headwinds appear to have eased somewhat, where it is worth noting that post the summer months, positive sentiment is returning as client demand is said to be robust with the company speaking of a good pipeline of business.
Looking ahead to next year, the dividend is, according to Investec, likely to increase to circa 17.2p, which adds to the attraction of a forward PER of little more than 11, based on expected pre-tax profit of £49.3m and EPS of 27.3p.
Additionally, AFM has a very chunky net cash position that should come out at the year end around £46.9m, swelling to £53.6m next year.
Of course, given the current global issues prevailing it is perhaps advisable to be cautious in looking ahead, but given the current market valuation of AFM which incidentally is made up of around 17% in net cash, any potential downside would already appear to be factored in.
Although as mentioned it hasn’t been an easy climate for AFM during the first six months, management were confident enough back in July when we spoke to reaffirm the belief in hitting the full year guidance, so the fall from a previous high has obviously been a disappointment.
Whilst a more competitive landscape has clearly prevailed, the company has carved itself a strong position as a global consulting player serving asset and wealth management operators along with other financial institutions and insurance players.
This has been achieved through ongoing organic growth along with shrewd strategic acquisitions driving strong cash generation, where there is a high-single-digit free cash flow yield of 8%.
Following its major acquisition of Lionpoint, North America now increasingly features for the business with continued strong trading and positive momentum, which should continue and really assist growth as the economic headwinds ease.
The Interim results are due out next month and there should be more on the table then, but having once again reiterated that it is trading in-line with expectations and what appears to be an improving outlook, the shares look one of the better and more quality plays out on the market.
I am hoping to catch up with management again around the time of those results and will add more in due course.
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