Alfa continues to deliver strong cash flow

Alfa Financials’ (ALFA) high margins, double-digit revenue growth and strong cash generation are all signs of a high-quality company. So why did private equity firm EQT pull out of a takeover of the asset finance software business?  

For the six months to June, Alfa’s revenue increased 21 per cent to £52.9mn. Despite some wage inflation, most of this filtered through. Operating profit rose 19 per cent, while cash generated from operations rose 47 per cent to £26mn. This strong cash flow enabled management to boost the dividend by 14 per cent.

The total contract value (TCV) was flat, but this was due to timing. There are three late-stage companies in the sales pipeline which Alfa insists are on the brink of signing on, with them included, TCV would be up 35 per cent. In total, there are 11 companies in the late-stage pipeline.

In June, the majority shareholder CHP Software agreed a deal with private equity firm EQT valuing Alfa Financial at 208p a share, but EQT pulled out of this deal the following month. One concern is that worsening economic conditions means a higher number of loans going bad and increased losses for Alfa’s customers.

It is worth keeping an eye on the fact Alfa’s research and development spending is only around 2 per cent of revenue, which looks on the low side. However, the company expenses a lot of this development through wages because it is constantly updating the product. Last year, it calculated investment in the product at £29mn, which is more like 30 per cent of revenue. 

Broker Investec forecasts EPS of 7.4p in 2024, giving a forward price/earnings ratio of 20, which isn’t that expensive. After another strong showing, Alfa is close to a re-rating but for now we stick to hold.  

Last IC View: Hold, 161p, 02 Mar 2023