August hasn’t been a particularly active month for me on the investment front, as the markets have by and large been in a sombre mood.
Fortunately, the majority of what I am holding continues to remain in the blue, although there are a few stocks that are now under water. That is of course, the nature of the beast and in general, I am comfortable with what I hold, although it is somewhat frustrating to see stocks such as CAPD which announced excellent interim results last week receive a muted market response.
The CAPD shares appear to my mind and indeed other market watchers extremely cheap, or at least very good value and although I am to date sitting on a decent profit (circa 32%) I remain optimistic that further gains will be realised in due course.
In the current climate, if a company announces decent figures the shares may trot up a few pence if you are lucky, whilst an in-line statement may result in a retrace, perish the thought though anyone unveiling a warning, which is likely to be seriously punished.
Moving on somewhat, last week I dropped into SDI Group’s Cambridge operation, which is very much on my doorstep and I met up with Mike Creedon the CEO along with Kate George of the Synoptics arm.
I’ve visited this arm a number of times since I have been invested with SDI which has seen the shares run up from the 8.5p range (2014) to a high of £2.19p earlier this year.
Suffice to say that things appear to be well on track here despite a recent retrace of the shares to £1.72p and investors like myself should hopefully be treated to another acquisition in the coming months, which I’m sure will be well received.
As far as new share purchases go in recent weeks, there hasn’t been much happening, although I have averaged down on RDT, along with making a maiden purchase in Alpha Financial Markets Consulting (AFM).
At a current £3.54p, shares in AFM are slightly up on my entry point which I hope bodes well for both the near and longer term, where the prospects look attractive for ongoing scalable growth.
The company is very much a focused consultancy business serving the likes of global asset managers, financial centres, pension providers and more recently insurance businesses.
Boasting 90% of the top 20 global asset managers as customers, AFM is fast becoming a sizeable operation with revenues for 2021 coming in at £98m which saw adjusted pre-tax profits of £19.6m delivered with adjusted EPS coming out at 14.3p.
Although on the face of things the current PER of 24 may look up with events for now, the company is extremely ambitious and appears confident on continuing to grow and further demonstrate that key element of very strong cash generation.
Indeed, broker Arden initiated coverage last week which sees guidance for both the year in progress (2022) and next year (2023) and they make a sound case for taking a closer look at the business, if not opting for an interest as I have elected to do.
The expectations here are for revenues to move to £124m and £141.4m with adjusted pre-tax profits of £24.2m rising to £28.4m which would see EPS of 16.8p and 19.4p being delivered.
On that basis the shares trade on a forward PER of 21 falling to 18, arguably suggesting that the recent share price momentum could be set to continue, particularly as those numbers may prove on the conservative side going forward.
At this juncture, it is also worth noting that the broker is also forecasting net cash to increase this year to £44m followed by £51.5m next year, whilst the dividend is anticipated to rise to 7.7p and subsequently 8.8p.
The business clearly ticks a number of the right boxes on the investment front and there is a good mix of both organic and acquisition assisted growth, where a more recent and notable purchase is now primed to make an impact.
This comes in the shape of US based Lionpoint which was bought for a base price of $54m and which brings with it major clients such as AVIVA, 3i and The Carlyle Group, the deal also saw AFM raising new money from shareholders to support the purchase.
The Lionpoint business is well established and seemingly highly regarded with around 120 operations across the globe which sees it with major offices in New York, Denver, Geneva, London and Sydney.
Importantly, it has also been growing strongly and looks to be an excellent fit for AFM where it provides for increasing opportunities particularly across the vast US market for the AIM quoted company.
Business wise, there are a number of drivers that play to AFM’s strengths such as constant industry regulatory changes and challenges that customers have to contend with, along with an ongoing transition to digitalisation and structural change.
Alongside extensive and in-depth consultancy, the company also enjoys revenue from its own software (SAAS) business fit that was boosted by the acquisition a few years back of Obsidian.
The latter provides specialist software products to the investment industry and although only founded in 2015 was considered an excellent purchase by AFM’s CEO and achieved at a decent price.
Given the nature of the AFM business and the areas it serves, the company looks very well placed to grow significantly in the years ahead, where, despite ongoing consolidation across the client sector, opportunities remain highly attractive, with a strong pipeline of new opportunities.
Contracts signed by the company are often extensive and multi-year with scope for additional services beyond an initial deal being inked and currently some 60% of total revenue is derived this way.
In terms of competition, there are at least six very big players on the global stage that AFM is competing with, but the company’s strength lies in an ability to differentiate with both quality and specialism providing it with further opportunities going forward.
To date, that appears to be the case and although Covid and the lockdowns of last year obviously resulted in challenges for the business, it appears to have weathered it very well and overall group NFI in full year 2021 increased by 10.2% which included a commendable 8% organic element.
Importantly, the company enjoys a sound balance sheet with the demonstration and delivery of strong cash generation as the £21m achieved last year from its operations shows.
With a business like this it isn’t the easiest of concepts to fully grasp or for that matter convey in a limited piece such as this, although it is always worth having a stab at it.
Operating and serving a vast market with numerous asset managers etc, of varying sizes AFM provides the advice, planning and solutions to help its clients improve its operations and offerings, particularly as so many have opted to go down the outsourced route.
This may include AFM assisting a client with an online platform or other digital expansion, thus making them more efficient or leaner in a competitive landscape.
Consultants within AFM’s various offerings are highly skilled and widely focused covering all areas serving the financial industry from IT to marketing design and support to name but a few.
This stands the company in good stead as many competitors only cover specific areas and by contrast are often more narrowly focused.
A case in point showing AFM’s strength came in a specific contract with a major global asset manager who wanted to redesign their strategic governance and core digital, sales, marketing & client services processes with the aim of improving the overall client experience with a focus on sales & improving internal efficiencies.
AFM firstly created the framework, followed by the defining and implementation of the model, then subsequently worked with and guided the client’s sales and marketing team through the process and beyond.
Within the AFM financial performance which is what investors will be keen to home in on, both operating cash flow and free cash flow per share have increased year-on-year revealing what appear to be impressive numbers.
This arguably further highlights the quality of the business and the investment potential going forward and it is perhaps also worth noting that the PEG currently stands at 0.6.
Overall, the business looks very well set to continue its expansion, growth and impressive track record on cash generation which should support a progressive dividend policy.
Not surprisingly there is a whole host of well known and highly regarded Institutional holders including Henderson, M&G and Gresham.
I am hoping to arrange a call with management in due course to add further comment and perhaps put a little more flesh on the bones.