Alfa Financial’s strategic diversification has resulted in a more varied client base. The top five customers who accounted for 61% of sales in 2019 represented only 35% of sales in 2023. Furthermore, their biggest customer now contributes less than 10% of revenue, a first in over eight years.

Although the growth in operating profit was relatively modest, escalating from just below £30mn to slightly above it, this was attributed to increased investment in staff. The company ended 2023 on a high note, with a surge in receipts that propelled its cash conversion rate to an impressive 115%.

A Stable Future Ahead?

While the cash conversion rate is expected to return to the long-term average of 100% in the forthcoming year, this is a common occurrence in the software industry. The company has demonstrated an excellent track record of converting earnings into real cash, which is generally a positive sign for shareholders.

Analysts have noted Alfa Financial’s leading market position in the asset finance technology platform, which promises significant potential for growth. This has been reflected in the share prices, with a forward price/earnings (PE) ratio for the current year of nearly 23 times. Given the company’s recent success and interest from private equity groups, this price is argued to be justified.

Investment Opportunities and Risks

Despite the modest growth in profit, Alfa Financial’s strategic diversification of its client base and shift to a subscription-based model have contributed to its strong market positioning. This, coupled with a healthy cash conversion rate, establishes the company as an attractive prospect for potential investors.

However, with the PE ratio currently standing at nearly 23 times, investors must weigh the investment opportunity against the potential risks. It is crucial to factor in the likelihood of the cash conversion rate normalising to the long-term average of 100%, which could impact future earnings.

Moreover, the company’s reliance on a small number of key customers, while reduced, still presents a concentration risk. Despite its recent diversification efforts, the loss of a significant client could have a substantial impact on revenue.

Economic Implications

The shift to a subscription-based model by companies like Alfa Financial reflects a broader trend within the software industry. This model could potentially lead to more stable and predictable revenue streams, benefiting both the companies and their investors. However, it remains to be seen how this shift will impact the broader market dynamics, particularly in terms of competition and pricing.

Overall, Alfa Financial’s recent performance and growth prospects indicate a positive outlook. However, as with any investment, potential risks should be carefully considered.