Berenberg upgrades Alfa Financial following 'difficult year'

Analysts at Berenberg upgraded software outfit Alfa Financial to 'hold' on Wednesday, noting that after a "disappointing year", the risks to the firm's profit and loss was being priced-in as a result of its recent share price weakness.

Over the past year, Berenberg had cut its estimates for Alfa "by as much as 55%" as a result of customer delays and cancelled contracts, but changed its tune somewhat on Wednesday.

"While we still think there is some risk to 2019 guidance as highlighted in our previous note when we downgraded to 'sell' in September, we cannot ignore that the shares have fallen a further 25% since this time," said Berenberg.

"With the company still cash generative and boasting an almost £40m cash pile, we feel the P&L risk is being priced in."

However, the German broker highlighted how there were still risks to the firm's guidance in the form of lower-than-expected revenues going forward.

Berenberg expects Alfa to record £72m in revenues next year, in line with management guidance, but with £55m coming from contracted revenue, the group must deliver £17m worth of incremental revenue from a mixture of new software implementation contracts and increased revenues from its ongoing development and services and maintenance divisions.

"Our issue, however, has been that with fewer customers finishing implementations in 2018 so far, we struggle to see how the other two business segments grow."

In our view, this leaves the majority of the sales gap to be filled through new implementation customers, of which there are approximately five in the company’s pipeline."

On the other hand, Berenberg, which reiterated its 115p target price on the firm, said Alfa’s light capital structure and simple cash flow meant it could generate a ROIC upward of 100%, despite its difficulties.

"With close to £40m cash on its balance sheet, no M&A ambitions and no dividend policy in place, we believe the company could look to reinvigorate some investor interest through capital returns."