Dowgate's Small-Cap Focus: Alpha FX

13 September 2021

At Dowgate, a crucial part of our strategy is identifying winning businesses that can provide superior returns over the long term. While we have a clear idea of the characteristics we are looking for in this process, it takes time to develop conviction in the companies we select. However, we get very interested when we find companies with a robust competitive niche that can increase their addressable market via successful technology adoption. Alpha FX is just such a company.


Our initial investment in the company came at the IPO on 7th April 2017. The company listed on AIM raising £30m at 196p, giving Alpha a market capitalisation of £65m. Today the company has a market capitalisation of £750m, yielding our clients a 10x return on their original investment. We continued to add to client positions on positive updates from the company. We supported the business in subsequent share placings in October 2018 @ 620p to provide capital for the forwards’ book and in April 2020 @ 680p for investing in the Alternative Banking business. Since float, Alpha has consistently compounded revenues, increase profits, and sustained steady margins whilst investing in new technology and people to grow their product offering and talent pool. Revenues have grown from £8.5m in FY 2016 (pre-IPO) to £46.2m in FY 2020 (x5 times) whilst underlying EPS has more than doubled from 13.4p in FY 2016 to 31.6p in FY 2020. This exceptional growth rate strongly correlates with increased staff headcount and client base during the same period, with both variables more than doubling. 


Alpha is a founder-led, UK-based provider of specialist FX (foreign exchange) risk management services and Alternative Banking (AB) solutions. The group brings technology and people together to provide high quality, bespoke strategies and service to a base of 800+ established and well-respected corporate and institutional clients spanning 30+ countries. They are a close-knit team of people committed to driving the business forward and achieving the best possible outcomes for their clients. This focus on quality has helped the company develop strong investment backing from quality institutional investors. 


The company’s principal segments are FX Risk Management (including institutional, corporate and overseas) and Alternative Banking. The most significant contributor to group revenues remains the FX Risk Management division at c75%. However, although small, the Alternative Banking division (payments, collections & accounts) is snowballing, and in the first half of 2021, it already contributed c25% of overall revenues. 


The FX division helps clients manage the currency exposure they accrue from the ordinary course of business. They do this through programmes involving spot and forward and options contracts. Forward contracts are a higher margin product than spot transactions but require higher working capital and risk control levels. It is a complex business to manage and involves close risk management scrutiny.    


The more recent Alternative Banking division provides payments and collections solutions to corporates, offering centralised cash management in 160 currencies. This division grew revenues by 417% in 2020, accelerating to 600% in H1 2021. Alternative Banking, like most payments businesses, is attractive and accretive. It provides sticky recurring revenues and high gross margins. We believe this business is now annualising revenue at nearly £20m pa. Based on other payment company valuations, this division alone could be £250m or about 40% of AFX’s enterprise value.     


April 2021 saw the launch of a new end-to-end technology stack in the AB business. This technology enables Alpha to onboard new clients more efficiently. It has accelerated growth leading to a record-breaking month in May 2021, a trend that seems to have continued to date. We believe that a further continuation of this trend would lead to forecast upgrades later this year.  


Alpha has recently opened offices in Malta & Milan. These openings follow successful openings in Toronto and Amsterdam post-IPO, both already delivering profitable growth. Alpha has also successfully launched an Institutional Division, providing FX services to financial institutions, such as asset managers and fund administrators. 


Critical to the success of Alpha is the emphasis on a solid corporate culture that relies extensively on developing and incentivising its staff. About 50% of AFX employees have ‘skin in the game’ through owning an equity stake or are working towards one. While Alpha’s founder and CEO, Morgan Tillbrook, still holds a meaningful 15% of the issued share capital, with several other senior managers with significant stakes. 


The H1 2021 results show promising signs that the revenue and profitability of Alpha FX are well underpinned, and indeed we think they are both likely to accelerate. By expanding its original niche capability in managing FX risk for its customers both geographically and into adjacent markets, AFX continues to scale its addressable market and potential for equity revaluation. 


Despite the impressive returns earned for our clients since IPO, we remain high conviction holders of Alpha FX shares over the long term. We like to own market leaders that are well-capitalised, debt-free, and agile enough to scale effectively and sustain earnings quality. We think Alpha FX has a long runway for continued growth combined with the opportunity for further re-rating. 


Dowgate Wealth’s holding in the above stock: 608,647 shares (reported on 13/09/21)

Written by Lewis Pether