MIDAS SHARE TIPS: Loans for combine harvesters can reap rewards

Equity financing is big business. In the UK alone, over £65bn has been lent to customers to buy specific items, while global spending exceeds £1trillion.

Cars are the most popular item purchased this way, but the industry encompasses an extensive range of goods from refrigerators to dishwashers and airplanes to combine harvesters.

Banks like this kind of loan because it is backed by real material, which they can repossess if necessary. Manufacturers are excited about asset financing because it allows customers to purchase goods that they may not be able to buy right away. And there are many specialized firms that also target the asset-backed finance market.

Alfa Financial Software provides all of these lenders with top-notch software that helps them offer financing quickly and smoothly, from the moment a potential borrower asks for money to the moment they pay off the loan.

The London-based company is a leader in its field, one of the few companies whose software can be used for all types of assets, by all types of lenders in any part of the world. The company is growing rapidly, is highly respected and conservatively managed. But the stocks have performed poorly. Priced at £3.25 when the company went public in 2017, the share has since been on a rollercoaster ride and now trades at just £1.59.

This drop seems undeserved. Recent results are robust, customers are loyal and a number of major lenders are knocking on Alfa’s door for access to the technology.

Last month, the group revealed a 20 per cent increase in first quarter sales to £27m, with CEO Andrew Denton expressing confidence in the future. Analysts are forecasting full-year revenues to rise 7 percent to more than £100 million, while earnings are expected to remain flat to last year’s £29 million, due to heavy investment in the company.

Unusually for a technology company, Alfa pays dividends, often opting for a small regular dividend supplemented by special payouts. Total dividends for 2022 were 9.2p, including 8p in specials. A regular dividend of 1.3 pence is forecast for this year, but more specials could be on the way as Denton is keen to reward shareholders when the group’s cash position allows.

A software engineer by training, Denton joined Alfa in the 1990s and has worked in nearly every part of the company before taking over in 2016. The group has grown significantly under his leadership, but there is much more to come. Asset finance software is a sizeable industry in its own right, worth £2.7 billion, and it is expected to double in size by 2030. Alfa holds less than 4 percent of this market, despite being a top player, but the bigger it grows, the more attention it attracts.

Many players in the asset finance market rely on outdated, cumbersome technology that is expensive to run and difficult to update. Alfa’s software is flexible, so it can be adapted to the changing needs and circumstances of companies. And they are changing.

One truck manufacturer is now sending mileage data directly to Alfa, so customers are billed only for the amount their trucks have driven. A boon to owners, this type of financing will almost certainly be rolled out more widely in the commercial and agricultural sectors.

Automakers are also experimenting with technology, including add-ons that charge when used, such as heated seats during cold spells or extra horsepower on weekends.

Some investors worry that asset financing markets will suffer as businesses and consumers grapple with rising interest rates and higher costs. But the data suggests otherwise. Alfa’s customers also operate in many countries and sectors, so even if there is a dip in one area, others can make up for it.

Today, the group has 32 customers and derives a third of its turnover from America and a growing percentage from other parts of the world. Four major new clients are expected to join the roster shortly, while another six are in advanced negotiations with Denton and his team.

The company has no debt, hence the ability to pay generous dividends to shareholders. And employees are loyal, unusual in the fast-evolving technology sector, and a testament to Denton’s leadership.

Midas verdict: Alfa has grown and developed in recent years, but stock lagged behind. At £1.59, the shares offer real potential – and the dividends add even more spice. To buy.

Traded on: Main market Ticker: ALFA Contact: alfasystems.com or 020 7588 1800