Launch Of Total Originations And AI-Enabled System 6 Will Expand Market Reach

Key Takeaways

• Expansion into U.S. auto and European equipment finance, alongside new products, is projected to accelerate revenue growth.
  
• Shift to a SaaS model and strong TCV increase bolster high-quality recurring revenue streams, enhancing earnings stability.
  
• Transition to SaaS and dependence on few large contracts pose revenue volatility risks, while rising costs could pressure net margins and earnings.

Catalysts

Through its subsidiaries, provides software and consultancy services to the auto and equipment finance industry in the United Kingdom, the United States, rest of Europe, the Middle East, Africa, and internationally.

• A significant expansion of Alfa's addressable market, driven by the launch of the new Total Originations product line, and major new wins in U.S. Auto and multi-country European equipment finance, are expected to accelerate revenue growth.
  
• Alfa's strategic shift to a Software as a Service (SaaS) model is noted as a key engine for revenue growth, with subscription revenues up 18% and subscription TCV up 26%, indicating a steady increase in high-quality recurring revenue streams, enhancing earnings stability and visibility.
  
• The launch of Alfa System 6, which includes 10 new modules and embedded AI capabilities, aims to differentiate the product and accelerate incremental sales by 2025, potentially boosting future revenue and profit margins.
  
• Strong growth in Total Contract Value (TCV) by 40%, supported by a robust sales pipeline with Alfa being a preferred supplier to key prospects, suggests a high likelihood of continued revenue growth and improvement in net margins through increased operational leverage.
  
• Continued recruitment to support sales pipeline and partner-led delivery model is set to expand reach and implementation capacity, aiming for accelerated growth and improved earnings as the successful transition of existing customers to Alfa System 6 and SaaS progresses.

Alfa Financial Software Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alfa Financial Software Holdings's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.8% today to 20.0% in 3 years time.
• Analysts expect earnings to reach £28.3 million (and earnings per share of £0.09) by about February 2028, up from £22.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.6x on those 2028 earnings, up from 30.7x today. This future PE is greater than the current PE for the GB Software industry at 32.9x.
• Analysts expect the number of shares outstanding to grow by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.33%, as per the Simply Wall St company report.

Alfa Financial Software Holdings Future Earnings Per Share Growth

Risks

• Decrease in software revenues by 33% due to the transition to SaaS and reduction in chargeable software development, which could impact overall revenue growth in the short term.
  
• Operating profit fell by £0.7 million, partly due to a drop in revenue from prior years, which alongside a higher effective tax rate, resulted in a 10% decline in diluted EPS, potentially affecting earnings.
  
• Software revenue is largely dependent on subscription TCV growth, which while promising, requires strong new customer acquisition and existing customer retention to maintain revenue stability.
  
• High reliance on TCV growth from a few significant contract wins implies potential volatility in revenue if future large contracts are delayed or lost.
  
• Expenses related to increased salary costs and capitalized development may challenge net margins if not offset by proportional increases in revenue or cost efficiencies.

Valuation

• The analysts have a consensus price target of £2.664 for Alfa Financial Software Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £141.7 million, earnings will come to £28.3 million, and it would be trading on a PE ratio of 34.6x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of £2.3, the analyst price target of £2.66 is 13.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.