Switch to subscriptions buoys Alfa Financial Software

The decision to move to a subscription-based business model has worked for Alfa Financial Software (ALFA). The asset finance software provider saw its total contract value (TCV) grow 16 per cent to £165mn in FY2023, thanks largely to growth in subscription sales. 

Investors will also welcome the diversification of the group’s client base. Its top five customers generated 35 per cent of sales last year – compared with 61 per cent in 2019. Management also noted that its largest customer now represents less than 10 per cent of revenue for the first time in over eight years.

Year-on-year growth in operating profit was modest – with the figure growing from just under £30mn to a fraction above it – but this was due to increased investment in staff. The group closed 2023 with a high level of receipts, which boosted its cash conversion rate to an impressive 115 per cent. 

This trend isn’t expected to extend into the current year, with management stating it is likely to fall in line with a long-term average of 100 per cent. While this is hardly unheard of, especially in the software space, it does show the business has an excellent track record of converting earnings into cash. This is often good news for shareholders.

“Alfa has the market-leading technology platform for asset finance, creating substantial upside in that space and other adjacent markets,” said Panmure Gordon analyst Harvey Robinson in January. The shares are starting to reflect this potential, and the forward price/earnings (PE) ratio for the current year is now nearly 23 times. We’d argue this is an acceptable price to pay given its recent success (and interest from private equity groups). Buy.

Last IC view: Hold, 153p, 31 August 2023