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Alfa future uncertain after project delays

Alfa Financial Software has issued a shock profit warning, sending its shares plummeting
June 6, 2018

In recent months, disappointing updates from some of the UK’s largest listed software companies have driven significant shifts in market sentiment towards the sector. Micro Focus’s (MCRO) shares plunged more than 50 per cent in March, after management cut its full-year sales guidance. In April, Sage (SGE) reduced its own full-year organic sales guidance by one percentage point, citing “inconsistent operational execution”. 

IC TIP: Hold at 164p

As if on cue, asset finance specialist Alfa Financial Software (ALFA) issued an unexpected profit warning last week, sending its shares tumbling by around 60 per cent in just two days in response. In fairness, Alfa has a free float of just 26 per cent, making the shares more susceptible to large fluctuations in value.

The problems stem from a major customer delaying its implementation project, due to underlying issues with its own internal systems. For now, Alfa understands this project should restart in early 2019. Meanwhile, two other contracts also face delays, while each customer considers expanding the scope of its plans. The respective projects may not be implemented until later in 2018 or 2019.

Management has revised full-year revenue guidance to £71m-£75m, down from £87.8m last year. Broker Numis had previously forecast £93.4m for 2018, but has slashed this to £70.8m and reduced its 2019 sales forecast by more than a quarter, too. Meanwhile, Alfa says operating profit will be materially below earlier expectations, because it has predominately fixed operating costs. Here, Numis has cut adjusted forecasts from £45.1m to £21m for 2018.

Even so, the brokerage lifted its recommendation from ‘add’ to ‘buy’ – noting that a “challenging backdrop” can provide a “compelling long-term entry point”. It also noted that management guidance and its forecasts require Alfa to win no further new business this year. Berenberg was less positive – moving from ‘buy’ to ‘hold’. The broker said revenue phasing has always been a key risk for Alfa’s business model, given that it generates such a high proportion of its revenue from a relatively small amount of software implementation contracts each year. It estimates that the group earns a drop-through margin of around 95 per cent on this revenue, prompting it to cut its adjusted operating profit forecast for 2018 by around half. Analysts here also sliced their target price from 600p to 170p.