August 29, 2019
Greg Dean, portfolio manager of the Cambridge Global Smaller Companies Fund, shares a stock idea from the Fund’s portfolio.
Alfa Systems is a relatively new holding that had a challenging first 18 months in the Fund, but which we continued to buy. It’s a UK-based software company focused on the asset finance industry. It encompasses numerous sectors, including vehicle manufacturers, heavy capital equipment manufacturers, lessors and banks. Alfa is by far the largest vendor of this type of complex software, and while it has been operating for over 25 years, it only went public in mid-2017.
After conducting due diligence, we determined the business was poised to grow substantially over the next three to five years and the stock was attractively priced at 325 pence on 2 June 2017; but given the limited access to management, we made it a small weight. It subsequently performed well and no longer represented a top 30-40 idea globally. Consequently, we decided to trim the weight, selling half our position over the next six months.
Since then the company revealed that several customers have deferred software purchasing decisions or paused implementation plans, resulting in revenue growth materially below our expectations at the time of the IPO. Through additional research into the situation, we feel comfortable that the business model is sound. It appears this is more of an order timing issue and 2019 orders will improve.
The current share price reflects market expectations of continuing headwinds, giving us an attractive margin of safety as we look to the future. We are confident in the outlook based on its balance sheet and existing profitability and believe there’s some upside and not a lot of downside from today’s prices.