Short on Alfa

Ravenous investors are devouring fintech’s IPO scraps. Financial software group Alfa is floating in the biggest UK offering this year by company value. The pricing looked rich to start with, but investors have bid it up even higher. Blame a general lack of big listings, especially for the technologically-enthused.

Alfa is worlds apart from most of the racy fintech companies taking on the banks, like peer-to-peer lenders Zopa and RateSetter. Founded in 1990, it sells software to companies like Bank of America, Barclays and Mercedes-Benz to manage asset-financing agreements.

If that sounds dull, the stock’s performance on Friday was anything but. Even before its 30 percent run-up during pre-float dealing, the 325 pence per share price implied an enterprise value of about 930 million pounds, taking into account net cash. Assuming margins stay flat and the 2017 top line increases by 24 percent – its compound annual growth rate since 2012 – Alfa’s enterprise value would be 44 times its EBITDA. That’s just above London-listed IT peer Sophos, which has almost doubled in price since listing in 2015.

After Friday’s share-price surge, Alfa’s enterprise value is almost 60 times forward EBITDA – well above Sophos and other comparable peers. Part of the enthusiasm could be down to the asset-finance market, which PwC reckons will grow by around 40 percent to end-2020. But the stratospheric-looking valuation would still be above that of Sophos even if Alfa grew revenue by 70 percent and kept the EBITDA margin flat. That’s unlikely, given its operating margin fell last year.

A more plausible explanation for the over-excitement is the paucity of large listings – particularly in the fast-growing fintech sector. In the first four months of 2016, London Stock Exchange IPOs had a cumulative market value of just below 6 billion pounds, at an average of 284 million pounds. Over the same period this year, the total was around 3 billion pounds and the average 120 million pounds.

With most of the UK’s well-known financial technology firms staying private for now, equity investors have also been starved of the chance to gain exposure to a much-hyped sector. Hence the apparent disregard for their likely returns.

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