Alpha FMC is a valuable asset

This has translated into an impressive financial performance. Sales have risen steadily over the past five years – even during lockdown – from £44mn to £158mn, while operating profit has jumped from £6.6mn to over £20mn. Alpha’s ability to turn profits into cash is also excellent - it has reported a cash conversion rate of over 100 per cent since 2019. 

When the going gets tough 

Past performance is all well and good, but what happens now? Asset managers have taken a beating in 2022. In October, US giant BlackRock (US:BLK) revealed that assets under management had tumbled to $8tn, down from $9.5tn this time last year. In the UK, shares in Schroders (SDR), Jupiter Fund Management (JUP) and Abrdn (ABDN) have fallen by 45 per cent, 59 per cent and 37 per cent respectively since the start of the year. After a lengthy bull run, the mood has well and truly turned. 

This has spooked investors, and shares in Alpha FMC have fallen by roughly 20 per cent since the start of the year. However, there are plenty of reasons to be optimistic. For starters, the group is still going strong. In the year to 31 March 2022, organic net fee income grew by almost a third. Momentum continued to build between April and September, with management reporting double-digit revenue growth once again, supported by a “healthy opportunity pipeline”.

Despite the darkening backdrop, the group is still on track to reach this year’s revenue target of £176mn, and management is confident the business will, by 2024, have doubled in size since 2020. Investec analyst Michael Donnelly says Alpha FMC proved its resilience during the pandemic and was one of just three companies to pass his “commando” stock screen, designed to find support services groups “tough enough to deflect most external assaults on revenue or costs”.

Alpha’s is protected in various ways. The group’s operating profit margin is roomy enough at 11 per cent and – as seen during the pandemic – it can cut costs when necessary. Entertainment and travel expenses can be trimmed, for instance, and its employee profit share scheme can be adjusted; according to analysts at Stifel, a broker, the average profit share is currently 20-30 per cent of base salary.

Alpha FMC has also diversified its client base, having entered the insurance consulting market in 2020. The new division has performed well so far, doubling its headcount in 2022 and expanding into France. Management now argues that the industry “offers an opportunity for alpha of comparable scale to our core asset and wealth management market”. Whether or not this proves to be true, it means the group is not relying exclusively on the asset management sector. 

Opportunities amid the gloom 

That said, struggling asset and wealth managers could spell opportunity for specialist consultants. Stephen Barrett, an analyst at broker Arden Partners, argues that “because markets have been so strong for such a long time, asset managers haven’t been forced to put through the structural changes or investment that’s needed”. Tougher times will “force the industry to focus on fee pressure and to consolidate,” he says.

Alpha is not an obvious beneficiary of consolidation. The more mergers that take place, the smaller its client base becomes. However, large deals – such as the £11bn merger between Abrdn and Standard Life in 2017 – can result in four or five years of systems' integration, which Alpha specialises in. Meanwhile, other operational challenges are often put on the back burner during mergers, and companies are forced to place catch-up – with the help of consultants – further down the line. “M&A can lead to a five- to 10-year book of business,” says Barrett.

It's not just further consolidation that the consultancy can look forward to. Fee pressure also shows no sign of abating as passive funds become ever more popular, and the focus on responsible investment looks set to intensify, meaning demand for specialist advice should be high. 

American dream 

The jewel in Alpha FMC’s crown is its US business. Growth in North America surpassed all other regions in FY2022, with organic net fee income up by 62 per cent year-on-year. Reputation is a big factor when it comes to consultancy, and the group is swiftly cementing its international standing, having now worked with 20 of the top 25 North American asset managers.  

The acquisition of Lionpoint for $90mn last year - easily the biggest purchase Alpha FMC has made so far – has added to the momentum. Lionpoint is headquartered in New York and specialises in alternative asset classes, such as private equity, real estate and private credit. This is expected to be big business as traditional assets continue to struggle, and Lionpoint has already supersized the group’s US sales record and consultant base.  

Importantly, the deal also opens up a number of cross-selling opportunities, and gives Alpha FMC access to clients that would otherwise be unreachable. Weak sterling is a further tailwind, and Arden Partners expects North America to generate around a third of group profits in the year to March 2023. Gross profit margins are currently lower in the US than in the UK – 33 per cent compared with 42 per cent – but management is confident that they will widen as operations mature.

Risk versus reward

Despite the Lionpoint acquisition, Alpha FMC has no debt other than some modest lease liabilities, and had a net cash balance of £64mn as of March. This leaves plenty of scope for more acquisitions, and there appears to be an abundance of options. Management said it is “keenly interested” in the Asia Pacific region, for example, as it is “experiencing the fastest increase in assets under management of any region thanks to rapid economic development and the emergence of a large middle class”. 

Expansion is not without risks, however, and the transition from a boutique consultancy to a global brand will need to be managed with care. Businesses tend to become more political and harder to manage as they get bigger, and additional layers of management are required. As headcount swells, wage inflation could also weigh on profitability. The group’s operating margin is still lower than pre-pandemic levels, and management said increased recruitment spend contributed to a sharp increase in administration costs in 2022. However, Alpha FMC’s operating margin is still comfortably in the double digits and chief executive Euan Fraser – who has been in post for almost 10 years – has deftly managed the expansion process so far. 

Shres in Alpha FMC have never been lowly rated. However, the price has faltered this year and analysts at Stifel argue that a forward price-to-earnings ratio of 17.5 is “relatively undemanding compared with international consulting peers”; Accenture (US:ACN) trades on a forward PE ratio of 24. Meanwhile, the bank estimates that Alpha FMC shares are rated at a 24 per cent discount to its average PE ratio. Given the company’s excellent track record and convincing growth opportunities – particularly in the US – that’s not to be sniffed at. Buy.