As an addendum to my analysis, I find several aspects of this business compelling:
1. Scalability: As a service-oriented company, it operates with minimal tangible assets, making it highly scalable.
2. Simplicity in Operations: Operating in the financial sector, the business avoids logistical challenges like shipping, inventory management, and fluctuations in raw material prices.
3. Industry Disruption: The traditional banking sector, where I have over two decades of experience, is notoriously inefficient. Banks have historically provided subpar services while charging exorbitant fees. For years, customers were forced to conduct all their foreign exchange (FX) business through their bank, despite the poor service and high costs. This inefficiency has paved the way for fintech disruptors like Alpha Group, which offers significantly better service and competitive pricing. The ease of electronic money transfers now allows customers to use third-party services, opening up a vast market. The foreign exchange market, possibly the largest in the world, presents a huge Total Addressable Market (TAM). Alpha's geographic expansion reflects its growing market share.
4. Long-Term Focus: Alpha Group is exceptionally well-managed, prioritizing long-term value over short-term profits. Their strategy echoes Jeff Bezos’ approach at Amazon, focusing on maximizing customer lifetime value. By prioritizing the customer experience, even at the expense of short-term profitability, Alpha secures repeat business, ensuring strong future cash flows and increasing the overall value of the company.
5. Bespoke Services: The company offers personalized guidance that is unmatched in the market. By tailoring cost-effective hedging strategies to each customer’s FX exposure, Alpha provides a level of service that goes beyond standard offerings, making it almost bespoke.
6. Regulatory Navigation: The financial sector is heavily regulated, requiring extensive due diligence processes like 'Know Your Customer' and 'Anti-Money Laundering' procedures. These processes are resource-intensive, especially for new clients. Large financial institutions often avoid onboarding small to medium-sized enterprises (SMEs) due to the low return on investment. However, Alpha Group’s agility allows it to serve as a conduit between SMEs and multiple financial institutions. This benefits customers by reducing the need to establish multiple banking relationships and benefits banks by aggregating SME trades through Alpha. This creates a win-win situation and, once set up, the switching costs make Alpha’s service highly sticky, ensuring recurring revenue and low customer attrition.
7. Strategic Positioning: While it may not be immediately apparent, Alpha is not just an FX business. To draw a parallel, consider Costco. Though it is widely seen as a retail business, its real engine is its membership model, which generates nearly all of its profit. 4% of its revenue comes from memberships, but that is almost 100% gross margin business involving little cost, so most of that drops to the bottom line and so accounts for over 70% of group profit. So Costco isn't a retail business, its a membership business. Without the memberships, Costco would fail. The retail earns very little and is just the bait to capture memberships. It's a very clever model. When Walmart in the US and Tesco in the UK try to compete with Costco on price, they are failing to understand that they are barking up the wrong tree! Returning our focus to Alpha, it operates on a "matched principal" basis, where every customer FX trade is offset by an opposite trade with a wholesale market counterpart, eliminating net FX exposure. Essentially, Alpha is providing a credit service, managing its risk through selective client acceptance and cash collateral, which acts like float in an insurance business. The interest earned on this collateral is a significant revenue source, much like Costco’s membership fees. This is nothing knew - Berkshire Hathaway has been making money this way for years! Consider that a bank is a wonderful business because it has a license to borrow money cheaply (on deposits) and then lend it out at higher rates (corporate debt, mortgages, etc), thereby generating income from the difference and all on other people's money. Alpha Group has an even better model because it isn't borrowing money cheaply, it is borrowing at zero percent!
I hope that this helps you to better understand this business.
There was recently a meeting hosted by Peel Hunt, broker of Alpha Group. The intention was to allow investors to ask questions about the transition of CEOs from Morgan Tillbrook to Clive Khan. The salient points of that meeting are as follows:
With over 20 years as a CEO in financial services, Clive Kahn has a proven track record of running and transforming FX and payments businesses, being involved in two management buy-ins and the successful sale of a business. He grew Travelex from 100 to over 6,000 employees across 35 countries and most recently served as the CEO of Takepayments, which was recently acquired for £200m.
Morgan, the founder and CEO of Alpha, will be leaving the business entirely and will not be staying on in a board position. As a hands-on founder, Morgan struggled with delegation as the company grew, and eventually the business became too big for Morgan to keep his arms around it. Clive discussed with Morgan that with him stepping down, he will no longer be in charge, and it was implied that this was something Morgan found difficult, leading him to prefer to leave the board and step away entirely. However, he has increased his already large equity stake in the business, so he has full confidence in the ability of his successor.
Both Clive and Morgan have made significant share purchases since the succession announcement, totaling over £2 million and £200k respectively. Clive has committed to building a substantial shareholder position in Alpha, affirming his conviction in the future prospects of the business and aligning himself with shareholders.
What changes does Clive plan to make? While on the board, there were no major conflicts regarding strategy; Clive will bring managerial and execution changes, accumulating marginal improvements rather than implementing larger changes, which investors made clear they were relieved to hear. Clive aims to introduce more structure, accountability, and KPIs compared to Morgan, who had a founder mentality and tended to get too involved in operations.
Clive emphasized that he will be significantly more engaged with shareholders than Morgan was. Given the lack of sell-side coverage, this increased engagement could facilitate stock discovery and serve as a positive catalyst for the share price.
Clive has no intention of changing the culture. While there is a risk of departures with Morgan, he does not anticipate any key individuals leaving and as a people business, any lack of loyalty would be his responsibility.
Capital Allocation: Clive is focused on long-term growth rather than short-term profitability, recognizing the company’s growth potential. Clive will consider acquisitions only if they enhance the long-term growth rate.
Morgan said: "People may wonder why I am not seeking to retain a seat on the board; fundamentally, it is due to the confidence I have in Clive and the freedom he deserves to lead Alpha. The Board has made many important decisions during my time at Alpha, and I have complete conviction in this one."
The Chairman, soon to be the new CEO, Clive Ian Kahn, just bought 25,000 shares at £21.17.
I love to see insiders use their own money to invest in the company that they are managing.
That is true alignment
As already noted, the retiring CEO bought 24,321 shares yesterday which is a huge vote of confidence in the prospects of the business. Normally retiring CEOs cash in their chips, this one is increasing his stake, which is over 13% of the business!
Despite announcing that he was stepping down as CEO yesterday and the fact that he already owns 13+% of the company, Morgan Tillbrook yesterday increased his holding by 24,321 shares after the market seemingly over reacted to the news causing the share price to drop 14%.
This suggests to me that the change of CEO was not acrimonious in any way and that there is nothing negative to be read into the news. All concerned are still very bullish about the prospects for this business.
Alpha Group International plc ("Alpha") announces that Morgan Tillbrook has decided to step down as Chief Executive and Director of Alpha Group International plc on 31 December 2024. He will be succeeded by Clive Kahn, who has been the company's Chairman since 2016, and who will be appointed as Chief Executive from 1 January 2025.
Morgan Tillbrook, current CEO of Alpha Group explained that after 15 years with the company, the time had come to hand the baton over to someone more suitable to manage the business in its next phase of growth. Tillbrook continues to be committed to the business as a strategic advisor. As evidence of his committment Morgan has made a personal commitment to the Board that he will retain a shareholding of no less than 10% for at least three years from the date of this announcement. Kahncurrently has a ~ 0.83% shareholding in the Group and has committed to meaningfully increase his equity stake. The timing of the transition is explained with reference to the recent successful sale of Kahn's company, 'takepayments', to Global Payments in April 2024. He is now free to commit all of his time, and far more of his wealth, to Alpha Group.
In Tillbrook's words:
"The journey I have been on with Alpha over the past fifteen years has been incredible, and I feel privileged to have been able to work with some amazing people who together have enabled us to build a truly special and global business. My decision to step down as CEO comes with the confidence that the business is on a strong and exciting growth trajectory, but also the conviction that there are people who would be better positioned for this stage in the Company's journey, and none more so than Clive. Whilst it has not been an easy decision, it is the right decision for a company I love and which, as the largest shareholder, I wish to continue going from strength to strength. It is also a decision that has been made far easier by my passing of the torch to Clive, and the exceptional leadership we already have in place across our diverse and decentralised business model. Clive has been a phenomenal Chair and mentor to me since he joined the Group in 2016, when our annual revenues were less than our monthly revenues are now. In Clive, the business has both a proven leader and a world-class operator, but crucially, someone who understands the Alpha culture."
Kahn commented, "Alpha Group is an exceptional company with an incredibly exciting future ahead of it. I have thoroughly enjoyed serving as its Chair over the last eight years. It will be a privilege to now lead the business as its CEO, and I would like to thank Morgan and the Board for the trust and confidence they have placed in me. I am confident that with the team and foundations we have in place, we will continue to take the business from strength to strength."
Unaudited Interim Results for the six months ended 30 June 2024.
- Group revenue increased by 16% to over £64m (H1 2023: £55m)
- Corporate division revenue increased by 12% to £30m (H1 2023: £27m)
- Institutional division revenue increased by 15% to £33m (H1 2023: £29m)
- Cobase revenue increased by 80% to £1m, compared to H1 2023 pre-acquisition
- Underlying1 profit before tax up 14% to £22.3m, and on an organic basis (excluding Cobase) grew 21% to £23.7m (H1 2023: £19.6m)
- Organic underlying profit before tax margin of 38%, and including Cobase was 35% (H1 2023: 35%)
- Average client balances increased by 11% to £2.1bn (H1 2023: £1.9bn)
- Net treasury income (client and own) of £42m (H1 2023: £34m), increasing Total Income by 19% to £107m (H1 2023: £90m)
- Profit before tax increased 18% to £60.8m (H12 2023: £51.4m)
- Basic earnings per share up 13% to 104.3p (H1 20232: 92.4p) and on an underlying basis increased by 8% to 37.1p (H1 20232: 34.5p)
- Strong cash and liquidity position, with adjusted net cash3 of £180m (31 December 2023: £179m)
- Completed £20m share buyback in June 2024, with a further share buyback of up to £20m initiated in June
- Proposed interim dividend of 4.2 pence per share (H1 2023: 3.7 pence)
- Corporate FXRM client numbers increased by 9% to 941 (H1 2023: 862)
- Institutional FXRM client numbers increased by 19% to 271 (H1 2023: 227)
- Institutional alternative banking account numbers increased by 31% to 7,030 (H1 2023: 5,350)
- Cobase client numbers increased by 55% to 169, compared to H1 2023 pre-acquisition
- Business well-positioned to deliver higher levels of operational gearing, as previous investments in people and technology begin to mature
- Group Front Office headcount increased by 11% to 157 (FY 2023: 142)
- Inclusion in the FTSE 250 in June, following a successful listing on the Premium Segment of the Main Market in May
- Appointment of Dame Jayne-Anne Gadhia to the Board as Chair Designate in May 2024
Outlook
Whilst macro headwinds remain, particularly within the alternative investment market served by our Institutional division, we have moved beyond the peak levels of uncertainty we saw in H2 2023. At the same time, our performance in H1 2024 has shown that we are able to continue growing strongly, even in less favourable market conditions. Moving into H2, we expect macro conditions to remain challenging, however, have continued to deliver strong results in July and August. We therefore have reasonable confidence that we are on track to deliver full-year results in line with expectations.
Morgan Tillbrook, CEO of Alpha Group International said:
"Our teams have continued to deliver a strong performance with double-digit growth across our corporate and institutional divisions, despite the challenging market backdrop, reflecting the strength of our diversified model and the rewards of our investments to date. Additionally, the current interest rate environment continues to produce a NTI tailwind, contributing further to our balance sheet strength, whilst also enabling us to announce this year up to £40m in share buybacks.
With the foundations established for long-term and sustainable growth through investment in our talent, product, and network of overseas offices, we enter the next chapter of our growth primed to 'expand' across our chosen verticals, retaining the same ambition and determination that has taken us from a single office in Berkshire to a FTSE 250-listed global operation in just 15 years.
Our overseas offices are closely following the successful blueprint established in the UK, providing a sense of the huge opportunity in front of us as we scale. At the same time, our strong cash position enables us to remain flexible to invest in those areas we feel would benefit from further capital.
It would be remiss of me not to recognize the hard work across the Group that has taken us to this point and will continue to drive us in the future. Our team members remain our greatest strength, and I would like to thank all for their essential contribution to our performance."
As an addendum to my analysis, I find several aspects of this business compelling:
1. Scalability: As a service-oriented company, it operates with minimal tangible assets, making it highly scalable.
2. Simplicity in Operations: Operating in the financial sector, the business avoids logistical challenges like shipping, inventory management, and fluctuations in raw material prices.
3. Industry Disruption: The traditional banking sector, where I have over two decades of experience, is notoriously inefficient. Banks have historically provided subpar services while charging exorbitant fees. For years, customers were forced to conduct all their foreign exchange (FX) business through their bank, despite the poor service and high costs. This inefficiency has paved the way for fintech disruptors like Alpha Group, which offers significantly better service and competitive pricing. The ease of electronic money transfers now allows customers to use third-party services, opening up a vast market. The foreign exchange market, possibly the largest in the world, presents a huge Total Addressable Market (TAM). Alpha's geographic expansion reflects its growing market share.
4. Long-Term Focus: Alpha Group is exceptionally well-managed, prioritizing long-term value over short-term profits. Their strategy echoes Jeff Bezos’ approach at Amazon, focusing on maximizing customer lifetime value. By prioritizing the customer experience, even at the expense of short-term profitability, Alpha secures repeat business, ensuring strong future cash flows and increasing the overall value of the company.
5. Bespoke Services: The company offers personalized guidance that is unmatched in the market. By tailoring cost-effective hedging strategies to each customer’s FX exposure, Alpha provides a level of service that goes beyond standard offerings, making it almost bespoke.
6. Regulatory Navigation: The financial sector is heavily regulated, requiring extensive due diligence processes like 'Know Your Customer' and 'Anti-Money Laundering' procedures. These processes are resource-intensive, especially for new clients. Large financial institutions often avoid onboarding small to medium-sized enterprises (SMEs) due to the low return on investment. However, Alpha Group’s agility allows it to serve as a conduit between SMEs and multiple financial institutions. This benefits customers by reducing the need to establish multiple banking relationships and benefits banks by aggregating SME trades through Alpha. This creates a win-win situation and, once set up, the switching costs make Alpha’s service highly sticky, ensuring recurring revenue and low customer attrition.
7. Strategic Positioning: While it may not be immediately apparent, Alpha is not just an FX business. To draw a parallel, consider Costco. Though it is widely seen as a retail business, its real engine is its membership model, which generates nearly all of its profit. 4% of its revenue comes from memberships, but that is almost 100% gross margin business involving little cost, so most of that drops to the bottom line and so accounts for over 70% of group profit. So Costco isn't a retail business, its a membership business. Without the memberships, Costco would fail. The retail earns very little and is just the bait to capture memberships. It's a very clever model. When Walmart in the US and Tesco in the UK try to compete with Costco on price, they are failing to understand that they are barking up the wrong tree! Returning our focus to Alpha, it operates on a "matched principal" basis, where every customer FX trade is offset by an opposite trade with a wholesale market counterpart, eliminating net FX exposure. Essentially, Alpha is providing a credit service, managing its risk through selective client acceptance and cash collateral, which acts like float in an insurance business. The interest earned on this collateral is a significant revenue source, much like Costco’s membership fees. This is nothing knew - Berkshire Hathaway has been making money this way for years! Consider that a bank is a wonderful business because it has a license to borrow money cheaply (on deposits) and then lend it out at higher rates (corporate debt, mortgages, etc), thereby generating income from the difference and all on other people's money. Alpha Group has an even better model because it isn't borrowing money cheaply, it is borrowing at zero percent!
I hope that this helps you to better understand this business.
There was recently a meeting hosted by Peel Hunt, broker of Alpha Group. The intention was to allow investors to ask questions about the transition of CEOs from Morgan Tillbrook to Clive Khan. The salient points of that meeting are as follows:
With over 20 years as a CEO in financial services, Clive Kahn has a proven track record of running and transforming FX and payments businesses, being involved in two management buy-ins and the successful sale of a business. He grew Travelex from 100 to over 6,000 employees across 35 countries and most recently served as the CEO of Takepayments, which was recently acquired for £200m.
Morgan, the founder and CEO of Alpha, will be leaving the business entirely and will not be staying on in a board position. As a hands-on founder, Morgan struggled with delegation as the company grew, and eventually the business became too big for Morgan to keep his arms around it. Clive discussed with Morgan that with him stepping down, he will no longer be in charge, and it was implied that this was something Morgan found difficult, leading him to prefer to leave the board and step away entirely. However, he has increased his already large equity stake in the business, so he has full confidence in the ability of his successor.
Both Clive and Morgan have made significant share purchases since the succession announcement, totaling over £2 million and £200k respectively. Clive has committed to building a substantial shareholder position in Alpha, affirming his conviction in the future prospects of the business and aligning himself with shareholders.
What changes does Clive plan to make? While on the board, there were no major conflicts regarding strategy; Clive will bring managerial and execution changes, accumulating marginal improvements rather than implementing larger changes, which investors made clear they were relieved to hear. Clive aims to introduce more structure, accountability, and KPIs compared to Morgan, who had a founder mentality and tended to get too involved in operations.
Clive emphasized that he will be significantly more engaged with shareholders than Morgan was. Given the lack of sell-side coverage, this increased engagement could facilitate stock discovery and serve as a positive catalyst for the share price.
Clive has no intention of changing the culture. While there is a risk of departures with Morgan, he does not anticipate any key individuals leaving and as a people business, any lack of loyalty would be his responsibility.
Capital Allocation: Clive is focused on long-term growth rather than short-term profitability, recognizing the company’s growth potential. Clive will consider acquisitions only if they enhance the long-term growth rate.
Morgan said: "People may wonder why I am not seeking to retain a seat on the board; fundamentally, it is due to the confidence I have in Clive and the freedom he deserves to lead Alpha. The Board has made many important decisions during my time at Alpha, and I have complete conviction in this one."
The Chairman, soon to be the new CEO, Clive Ian Kahn, just bought 25,000 shares at £21.17.
I love to see insiders use their own money to invest in the company that they are managing.
That is true alignment
As already noted, the retiring CEO bought 24,321 shares yesterday which is a huge vote of confidence in the prospects of the business. Normally retiring CEOs cash in their chips, this one is increasing his stake, which is over 13% of the business!
Despite announcing that he was stepping down as CEO yesterday and the fact that he already owns 13+% of the company, Morgan Tillbrook yesterday increased his holding by 24,321 shares after the market seemingly over reacted to the news causing the share price to drop 14%.
This suggests to me that the change of CEO was not acrimonious in any way and that there is nothing negative to be read into the news. All concerned are still very bullish about the prospects for this business.
BREAKING NEWS
Alpha Group International plc ("Alpha") announces that Morgan Tillbrook has decided to step down as Chief Executive and Director of Alpha Group International plc on 31 December 2024. He will be succeeded by Clive Kahn, who has been the company's Chairman since 2016, and who will be appointed as Chief Executive from 1 January 2025.
Morgan Tillbrook, current CEO of Alpha Group explained that after 15 years with the company, the time had come to hand the baton over to someone more suitable to manage the business in its next phase of growth. Tillbrook continues to be committed to the business as a strategic advisor. As evidence of his committment Morgan has made a personal commitment to the Board that he will retain a shareholding of no less than 10% for at least three years from the date of this announcement. Kahncurrently has a ~ 0.83% shareholding in the Group and has committed to meaningfully increase his equity stake. The timing of the transition is explained with reference to the recent successful sale of Kahn's company, 'takepayments', to Global Payments in April 2024. He is now free to commit all of his time, and far more of his wealth, to Alpha Group.
In Tillbrook's words:
"The journey I have been on with Alpha over the past fifteen years has been incredible, and I feel privileged to have been able to work with some amazing people who together have enabled us to build a truly special and global business. My decision to step down as CEO comes with the confidence that the business is on a strong and exciting growth trajectory, but also the conviction that there are people who would be better positioned for this stage in the Company's journey, and none more so than Clive. Whilst it has not been an easy decision, it is the right decision for a company I love and which, as the largest shareholder, I wish to continue going from strength to strength. It is also a decision that has been made far easier by my passing of the torch to Clive, and the exceptional leadership we already have in place across our diverse and decentralised business model. Clive has been a phenomenal Chair and mentor to me since he joined the Group in 2016, when our annual revenues were less than our monthly revenues are now. In Clive, the business has both a proven leader and a world-class operator, but crucially, someone who understands the Alpha culture."
Kahn commented, "Alpha Group is an exceptional company with an incredibly exciting future ahead of it. I have thoroughly enjoyed serving as its Chair over the last eight years. It will be a privilege to now lead the business as its CEO, and I would like to thank Morgan and the Board for the trust and confidence they have placed in me. I am confident that with the team and foundations we have in place, we will continue to take the business from strength to strength."
4 September 2024
Alpha Group International plc
Unaudited Interim Results for the six months ended 30 June 2024.
- Group revenue increased by 16% to over £64m (H1 2023: £55m)
- Corporate division revenue increased by 12% to £30m (H1 2023: £27m)
- Institutional division revenue increased by 15% to £33m (H1 2023: £29m)
- Cobase revenue increased by 80% to £1m, compared to H1 2023 pre-acquisition
- Underlying1 profit before tax up 14% to £22.3m, and on an organic basis (excluding Cobase) grew 21% to £23.7m (H1 2023: £19.6m)
- Organic underlying profit before tax margin of 38%, and including Cobase was 35% (H1 2023: 35%)
- Average client balances increased by 11% to £2.1bn (H1 2023: £1.9bn)
- Net treasury income (client and own) of £42m (H1 2023: £34m), increasing Total Income by 19% to £107m (H1 2023: £90m)
- Profit before tax increased 18% to £60.8m (H12 2023: £51.4m)
- Basic earnings per share up 13% to 104.3p (H1 20232: 92.4p) and on an underlying basis increased by 8% to 37.1p (H1 20232: 34.5p)
- Strong cash and liquidity position, with adjusted net cash3 of £180m (31 December 2023: £179m)
- Completed £20m share buyback in June 2024, with a further share buyback of up to £20m initiated in June
- Proposed interim dividend of 4.2 pence per share (H1 2023: 3.7 pence)
- Corporate FXRM client numbers increased by 9% to 941 (H1 2023: 862)
- Institutional FXRM client numbers increased by 19% to 271 (H1 2023: 227)
- Institutional alternative banking account numbers increased by 31% to 7,030 (H1 2023: 5,350)
- Cobase client numbers increased by 55% to 169, compared to H1 2023 pre-acquisition
- Business well-positioned to deliver higher levels of operational gearing, as previous investments in people and technology begin to mature
- Group Front Office headcount increased by 11% to 157 (FY 2023: 142)
- Inclusion in the FTSE 250 in June, following a successful listing on the Premium Segment of the Main Market in May
- Appointment of Dame Jayne-Anne Gadhia to the Board as Chair Designate in May 2024
Outlook
Whilst macro headwinds remain, particularly within the alternative investment market served by our Institutional division, we have moved beyond the peak levels of uncertainty we saw in H2 2023. At the same time, our performance in H1 2024 has shown that we are able to continue growing strongly, even in less favourable market conditions. Moving into H2, we expect macro conditions to remain challenging, however, have continued to deliver strong results in July and August. We therefore have reasonable confidence that we are on track to deliver full-year results in line with expectations.
Morgan Tillbrook, CEO of Alpha Group International said:
"Our teams have continued to deliver a strong performance with double-digit growth across our corporate and institutional divisions, despite the challenging market backdrop, reflecting the strength of our diversified model and the rewards of our investments to date. Additionally, the current interest rate environment continues to produce a NTI tailwind, contributing further to our balance sheet strength, whilst also enabling us to announce this year up to £40m in share buybacks.
With the foundations established for long-term and sustainable growth through investment in our talent, product, and network of overseas offices, we enter the next chapter of our growth primed to 'expand' across our chosen verticals, retaining the same ambition and determination that has taken us from a single office in Berkshire to a FTSE 250-listed global operation in just 15 years.
Our overseas offices are closely following the successful blueprint established in the UK, providing a sense of the huge opportunity in front of us as we scale. At the same time, our strong cash position enables us to remain flexible to invest in those areas we feel would benefit from further capital.
It would be remiss of me not to recognize the hard work across the Group that has taken us to this point and will continue to drive us in the future. Our team members remain our greatest strength, and I would like to thank all for their essential contribution to our performance."