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Alfa shares fall on raised expectations

The asset finance software group said currency headwinds would impact sales growth in 2018
March 9, 2018

Alfa Financial Software's (ALFA) IPO last summer was the largest UK tech listing since 2015. The clamour for the shares subsequent to the flotation pushed the group's market capitalisation beyond £1bn. Investors would have felt vindicated at the time of August's half-year results, which topped analysts’ expectations, but trading on a sky-high forward multiple, a lot was riding on the company’s maiden set of full-year numbers as a publicly traded entity.

IC TIP: Hold at 401p

Alas for Alfa, which supplies software to the asset finance industry, its share price fell nearly a fifth on results day. While performance was roughly in line with brokers’ forecasts, bosses now expect the weakening dollar to dampen revenue momentum in 2018 – giving rise to low double-digit growth, or mid double-digit growth at constant currencies. Hardly a disaster, but expectations were high, and dollar value significantly impacts group revenue and cash-flow, while the US comprises more than half of the top-line.

In fairness, the shares’ decline appeared excessive given it's an issue beyond management's control, and was undoubtedly exacerbated by the group’s relatively small free-float, which sits at 26 per cent. Small transaction volumes can thus inspire major share price fluctuations.

Other aspects of the results were more encouraging. While software implementation – the largest reporting segment – saw revenue fall 7 per cent to £44.8m, this reflected customers’ progression towards Alfa’s ‘ongoing development and services’ (ODS) business. Sales here ramped up a whopping 144 per cent to £21.2m, as the number of ODS customers contributing more than £300,000 in sales rose from eight to 14. Alfa recently announced a deal with a global equipment manufacturer, which will initially focus on Europe but could lead to business further afield. This should drive revenue growth in the second half of 2018. As a 'middle tier' deal, Barclays estimates the contract value to be around £5m to £10m – ranking among the group’s largest historical wins. That said, 2017’s lower implementation revenue drove a 30 per cent decline in operating cash flow, as upfront licensing payments fell and were matched by a decline in deferred revenue on the balance sheet.

Having downgraded their forecasts, analysts at Barclays now expect adjusted pre-tax profits of £45.6m and EPS of 11.7p in 2018, against £40.7m and 10.4p in 2017.

ALFA FINANCIAL SOFTWARE (ALFA)  
ORD PRICE:401pMARKET VALUE:£ 1.2bn
TOUCH:400-401p12-MONTH HIGH:548pLOW: 374p
DIVIDEND YIELD:nilPE RATIO:44
NET ASSET VALUE:18p*NET CASH:£31.3m
Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201443.318.2nana
201554.022.9nana
201673.317.22.8nil
2017**87.833.99.1nil
% change+20+97+225-
Ex-div:na   
Payment:na   
*Includes intangible assets of £24.7m, or 8.2p a share **Alfa floated in June 2017