Investment Thesis:

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AEP Plantations Business Model:

AEP Plantations is a palm oil company, with all operations in Indonesia - the world’s top palm oil producing country: see below. Palm oil is produced from the fleshy fruits of the palm tree, which are processed in mills into crude palm oil (CPO). The palm kernels can also be processed to produce palm kernel oil. This is sold to local buyers or exported.

The stock has been recommended multiple times to members since then - each time more shares have been added to the Real Worth Stocks portfolio. It currently comprises 14% of the portfolio: the third largest holding of twelve.

Market for Crude Palm Oil (CPO): AEP’s main product

AEP has one main product: crude palm oil (CPO) so the price of this commodity drives their revenues and profits. Pre-pandemic, the price was around $500-$750/tonne from 2015-2020, but then there was a huge spike in price in 2021 and early 2022, up to $1900/tonne. Prices then settled to a lower level in 2023-2024, before picking up to average around $1200/tonne in 2024-5. At this price, palm oil production is very profitable: in H1 2025 AEP made £37M in free cash flow, which is about 7% of their market cap in 6 months.

The Indonesian market for palm oil is also being driven by an increase in demand from biodiesel (made from CPO): the government has mandated an increasing percentage of biodiesel in the diesel sold there, starting with 10% in 2016, and now 40% in 2025. There was a plan to further increase this to 50% in 2026, but this was put on hold on 14th January, due to the falling oil price. However, should the oil price increase then this is likely to go ahead.

Due to the population increase over time in Indonesia driving fuel demand, there are forecasts for significant increases in biodiesel demand over time: see chart below:

Capital Allocation of 2026 Earnings

I assume that AEP earn £74M in cash in 2026, as they are estimated to have done in 2025. They have announced an £8M buyback scheme for H1 26, and are likely to pay a dividend of £9M in the year of 2026. This means that they will likely retain 77% of 2026 earnings.

Capital Allocation of Retained Earnings on AEP’s Balance Sheet

AEP as of H1 25 had £183M of surplus cash over and above their working capital on their balance sheet, vs a market cap of £531M. By Dec-25, I have estimated based on the CPO price in 2025, that they will have £223M of surplus cash on their balance sheet: this is 42% of the market cap: and the company is valued at just 7x free cash flow, at 1400 p/share. If they continue with their already announced share buyback and dividend plans, by Dec-26 they will have £270M of cash on their balance sheet: which is 51% of the market cap!

This cash is not being valued by the market, because a very similar company called M.P. Evans who also produce palm oil in Indonesia, and are also listed on the LSE, are valued at a similar P/E ratio to AEP, but don’t have a huge cash pile.

The market is discounting the value of AEP’s cash; possibly because:

• AEP have not announced their H2 2025 results yet, so people do not know how much cash they have, or

• People believe that the cash will just sit on the balance sheet and not be put to work to earn a good return.

Of course, AEP could reinvest capital to purchase more palm oil plantation assets. However, there is a limit of 100,000 hectares per palm oil company imposed by the Indonesian government. With a reasonable assumption of a purchase price of $12,000/hectare, AEP already have enough cash on hand as of Dec-25 to hit this limit: and they could not possibly buy all of this land at once since it would mean expanding their planted area by 50% or so. Rather, I think that they should distribute surplus cash, and invest in more land gradually, from ongoing profits from their operations.

How could AEP return cash to shareholders?

Here are a few ways AEP could return cash to shareholders:

1. B-share scheme: this is where AEP issues new shares pro rata to existing shareholders, then pays cash to buy them back at a set price and cancels them, reducing their capital in the process. If structured correctly, this may be able to be done as a return of capital, potentially avoiding capital gains taxes. It would enable as much cash as desired to be returned.

2. Special dividend: this would trigger dividend taxes for shareholders, but would enable the company to return as much cash as it desired.

3. Share buybacks: these are limited to 25% of the daily trading volume: so are limited in their scope since AEP is >50% owned by the Genton trust, and 17% owned by Nokia Bell Pensioendfonds, a Belgian pension fund, so the free float is more limited

4. Tender Offer: again this would allow as much cash as desired to be returned to shareholders, by AEP setting a price for repurchasing shares, and requesting shareholders to tender their holdings at that price.

Action to persuade the AEP board to Improve Capital Allocation:

If you would like to get involved in campaigning for the board to return capital to investors, and also better communicate a capital allocation policy, contact me through Substack, or DM me on X at x.com/realworthstocks. An improved capital allocation policy could be the catalyst to unlock substantial shareholder value. Even if this does not happen, the stock currently gives a 14% free cash flow yield, with 42% of the market cap in surplus cash so there is good downside protection and growth.

I have written twice to the board to urge them improve capital allocation: please see my first two letters to them below.

In the first letter, I urged the board to convert their cash holdings from Indonesian rupiah (INR) to US dollars (USD), because the rupiah’s value was depreciating, losing shareholder value. In their response, they confirmed that they were doing this and were 40% complete as of April 2025.

250319 Letter To Anglo Eastern Plantations Plc Substack

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In my second letter in January 2026, I advocate for a large return of capital to shareholders. I have not yet received a response to this letter.

260101 Letter To Anglo Eastern Plantations Plc

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Disclosure: I have a long position in AEP Plantations (AEP). While every effort has been made to ensure the accuracy of the information in this post, no guarantee is given as to its accuracy. This is not investment advice.

Investment Thesis:

Gamma Communications (GAMA) is a business communications software services provider, trading at 13x earnings, growing 5%-10%/year, with 90% recurring revenue. It has ROIC and ROE of 24%, and has just made a significant acquisition in the German market, which is growing at a CAGR of 15% 2025-2030. Due to promotion from AIM to the FTSE 250 in the UK, macro-economic fears about the UK and Germany, and most importantly, a slowdown in organic revenue growth to mid to high single digits, the stock has fallen 58% from its all time high in 2021, to a six year low. This is despite earnings being up 30% since 2021, creating an excellent entry point, and making downside risk low. Since the 2014 IPO, it has not been valued at this low a P/E by the market.

Business Model

Gamma has three divisions selling communications and software products:

1. Business: (64% revenue) selling to channel partners, who sell to SME customers

2. Enterprise (22% revenue) selling directly to large companies and the public sector

3. Europe: (14% revenue)* selling direct and through channel partners to Germany, and also the Netherlands and Spain. *not including recent acquisition of STARFACE in the German market.

Part of their business model is to turn, ‘product,’ from Microsoft and Cisco into cloud based ‘solutions,’ for their customers: packaged cloud services sold directly or to channel partners to organisations.

89% of revenue is recurring: and is made of two components:

1. Voice and data traffic (19% of revenue)

2. Subscriptions, rentals, and installation fees: (70% of revenue)

Non-recurring revenue products are equipment sales, commissions and installation fees: (11% of revenue)

Technologies/strategies that are used in their products are:

1. Unified Communications as a Service (UCaaS): bringing together various communication types, e.g. voice calls, video, WhatsApp, etc. in one cloud-based application.

2. Voice enablement: allowing Microsoft Teams to make and receive voice calls to phone numbers

3. VoIP (voice over internet protocol) services, through SIP trunks.

4. IoT (internet of things) enablement, to allow devices to communicate with the cloud without dedicated phone lines, e.g. for the AA in the UK

Expansion of product offering, and growth through acquisition:

Gamma have been buying companies to expand their product offering. Recent acquisitions include:

1. STARFACE in Feb 2025: about 500k cloud/hardware seats in Germany

2. Placetel in Sep 2024: 270k Cisco users

3. Coolwave: 2024: MS Teams voice enablement service for 20 countries

4. Brightcloud: 2024: Contact centre solutions

5. Satisnet: 2023: Cyber security services

Gamma’s company goals are:

1. Create a common pan-European solution for UCaaS: which their channel partners like, since it offers the ability to sell a broad range of products in many countries.

2. Rebuild their customer portals to integrate all their acquired products into one interface, for all routes to market (direct and channel), and have good customer service across all.

3. Replicate success in Enterprise division in the UK, in Germany

4. Integrate acquisitions and create a common culture of values and goals for people across the business (across Europe)

Competition and Market

Their main markets are the UK (57% cloud penetration) and Germany (20% cloud penetration). The German market is growing faster, with the market for cloud seats forecast to grow at 15% CAGR 2025-2030.

Competitive advantages: Gamma state that their competitive advantages are their ability to provide a complete set of solutions across multiple countries in Europe, with good customer service, citing customer experience surveys vs industry and telecoms benchmarks. They do however state that they want to relaunch a unified customer portal: this is a work in progress. Over time as they make acquisitions and broaden their offering, they are improving their competitive position.

Competitors: the table below shows some direct competitors, e.g. NFON in the German market, Maintel in the UK market, and also comparable companies in the US.

NFON is a venture capital backed, money losing UCaaS company in Germany that directly competes with Gamma. It has just broken even for the first time after breakeven after eight years of losses, and has grown mostly organically: though it did issue shares and made one acquisition a few years ago. In the 2022-2023 period revenue growth slowed to 7% then 2% respectively.

Maintel Holdings is a slow growing UK listed company that is in most of the same product areas as Gamma, but is much less profitable, with negative retained earnings.

Ringcentral and 8x8 are large US-based comparators: but both have business in Europe so are also Gamma competitors. Ringcentral has a tie up with Vodafone. Both are prioritising growth over profitability, and make losses continually, though in both cases growth has been in the very low/negative single digits in the last couple of years vs teens double digit growth historically.

It is also notable that of all the companies examined, Gamma is the only one not growing it’s share count: all others are diluting by 3%+ a year.

In summary: Gamma is more profitable than its competitors, and is not diluting shareholders despite growing. This is reflected in the higher price:sales ratio vs competitors.

Capital Structure

Gamma Communications has a simple capital structure, with one class of shares outstanding, and no long term debt. They obtained a £130M revolving capital facility to buy STARFACE, but as of June 2025, it was only 1/3 drawn down, and the company net debt position was £22M: which is just 0.25x earnings, so their balance sheet is very strong.

Capital Allocation

Share buybacks (1/3-1/2 of earnings)

Gamma started share buybacks for the first time in 2024 with 1/3 of earnings, and increased this by 50% in 2025, almost completing this by June 2025.

Dividends (1/4 of earnings)

Gamma has a progressive dividend policy: with payments rising 10%-15% per year since IPO in 2014.

Acquisitions:

Gamma had £145M in cash on the balance sheet at year end 2024, but then acquired STARFACE in early 2025 for £164M using mostly existing cash reserves. It also established a £130M (1.4x EBITDA) revolving capital facility to finance the acquisition: which is only drawn down by £47M. Overall, it is in a small net debt position (0.25x earnings). Probably by FY 2025 end, this will be paid off in full if no more acquisitions are made. However, I expect to see continued smaller acquisitions as Gamma builds out its product offering, and management have stated that:

Durability, Quality & Risks

Durability: Gamma signs multi-year contracts with its direct customers, and the nature of their business providing a communications service means that 90% of revenue is recurring. The business spends about 20% of operating profit on PP&E, most of which is on intangible assets such as software.

Earnings Quality: I have analysed owner earnings vs reported earnings: which is shown in the graph below. For 2019-2024, owner earnings is about 10% higher than profit. This is because less is spent on capex, than depreciation/ amortisation. In addition, the working capital increase during this period is only about 13% of total earnings in the period, so not much working capital is required in order to grow the business. This underpins owner earnings and means that a lot of cash is available for returns of capital through dividends, buybacks, and to finance growth through acquisition. Gamma also has an excellent return on invested capital and return on equity, both with a median of 24% over the last 10 years, though they both fell to about 20% since the pandemic.

Timing of cash flows: customers pay up front for subscriptions/rentals (70% of revenue), and in arrears for voice/data traffic for voice data traffic (20% of revenue). Therefore, not much working capital is needed to grow the business since the majority of revenue is recognised when the service is delivered, after the business has received the cash.

The biggest single cost by far is their employees, at over 50% of their operating expenses, which is a very predictable cost: and other significant costs such as product licences are predictable as well, so their margins are quite stable.

They are also in growing markets, with 57% cloud penetration in the UK and just 20% in Germany. Their ability to grow earnings in future will depend on three things:

a) ability to maintain margins in their product range

b) ability to meet their customer needs, as they evolve for various reasons, e.g. change due to AI.

c) overall UCaaS market growth

Quality of earnings:

Risks

Cyber Security:

Gamma is accredited to ISO 27001 (information security) and ISO 22301 (business continuity). Gamma do routine and bespoke penetration testing, with continuous compliance checking and integrated security training for all employees. They also purchased Satisnet, a cyber security company so this is part of their product range, and so they have internal expertise in this area.

Risk assessment by all, but risks owned by named people:

All employees are encouraged to consider and document risks, which are passed to the relevant risk owner and assessed with appropriate actions taken, and passed quarterly to the risk and audit committee.

The board owns the most significant risks: the ones which could have a material effect on the business.

Threat of AI: Gamma comments that the cost of new entrants using AI to outperform their product would be prohibitive. However, I am concerned that as their well-funded competitors integrate AI into their product ranges, that Gamma continues to spend enough on R&D each year: mostly on software. If they cannot keep innovating they may be left behind in this area. This plays into the next risk:

Slow responses to shifts in competitive landscape: Gamma mitigate this by constantly engaging in 2-way dialogue with customers, and also by M&A.

I think that the two risks above are probably the greatest risks to Gamma: technological shifts that could affect their profitability, and growth. Set against this is that customers typically sign multi-year contracts, and also that there is not a high rate of customer turnover. This is something that I will continue to monitor on an ongoing basis: by looking at margins, and how the number of cloud seats that the business holds changes over time.

Competition for staff in sales DevOps and IT Security: this risk relates to their profit margins: if they have to pay more for the right staff, this could lead to lower margins. This is not reflected in their margins at the moment however, which are stable.

Growth

Total revenue growth at Gamma is charted below. Revenues grew strongly up to and during the pandemic, then dropped off. I think that the drop off is due to:

- pulling forward of demand for conversion to cloud services due to remote working requirements in the pandemic, so there is lower demand afterwards

- the macroeconomic slowdown in 2022-2023

- reductions in remote working reducing demand for new UCaaS licences, as remote workers returned to the office to work hybrid

All of these factors led to slower growth for most UCaaS companies since the pandemic, which in turn led to their share prices declining significantly, including Gamma’s. The peak in share price was reached in August 2021, at around £23/share, and it has now declined to £10/share.

Organic growth for Gamma in 2024 was 5%, and inorganic growth was 6% for a total of 11%. Inorganic growth includes the Placetel, Brightcloud, Satisnet, and Coolwave acquisitions, but this does not include any growth from STARFACE in Germany, since this was purchased in Feb-25, after the FY24 year end.

Germany now represents 20% of total revenues, and there is a 15% CAGR forecast in cloud seats in Germany over the next 5 years for the market. 43% of the UK market, and 80% of the German market still do not use cloud services, so there is significant room to grow. In addition, many of the German customers of STARFACE are using a hardware PBX communications system. If Gamma can switch them over to the cloud, they could double ARPU (average revenue per user) if switching to MS Teams, or even more if UCaaS offering: so they have an opportunity to upsell existing customers.

Prior to the pandemic, Gamma grew at 11%-20% a year, and in 2022-23, at 8% each year. In the case of Gamma Communications, we can conservatively assume that organic growth rate of 5% seen in 2024 will be the same going forward: which is less than the rate of 8% in 2022 and 2023.

Environmental, Social and Governance Factors:

Environment:

Gamma has committed to reduce scope 1 and 2 emissions by 90% by 2030, and be a net zero company by 2042, and is currently in the process of creating a costed plan to achieve this according to the Transition Plan Taskforce (TPT) methodology. TPT guidelines were launched by the UK Treasury department in 2022. More than 90% of Gamma’s emissions are scope 3: coming from its use of purchased goods and services, principally cloud computing services.

Social:

Gamma cited responses to their employee feedback survey: where employees requested:

- better alignment of quarterly top management roadshow meetings to the company strategic pillars and values

- improved visibility of internal vacancies

- greater focus on training and development

Gamma has, ‘YouBelong,’ groups to meet and discuss topics and suggest ways the company can improve their experience. The citation of employee survey results, etc. in the annual report, suggests that the company is actively seeking feedback from their employees and is listening to them. Glassdoor reviews of working at Gamma give an overall rating of 3.4, with a 68% approval rating for the CEO.

Unions are not mentioned in the 2024 Gamma Annual report: and there is no indication that workers are unionised or collective bargaining arrangements are in place.

Governance:

As Gamma integrates acquisitions and moves to the UK main market (in May 2025), they are making governance more systematic and consistent: e.g.

- Adopting the UK Corporate Governance Code

- in 2023, they have implemented one integrated management system for all ISO standards they are accredited to

- formation of an M&A committee in 2024 to ensure all M&A opportunities went through a consistent vetting process

External audit: The auditor Deloitte found no issues: the following matters were identified as key audit matters:

1. The accuracy of Gamma business usage revenues, and reporting controls.

2. Carrying value of goodwill in their Netherlands subsidiary, which is experiencing slower growth.

3. Valuation of the consideration to buy Placetel: which also involved entering into a 5 year contract to buy Cisco services.

Board:

CEO Andrew Belshaw is a chartered accountant, with Gamma since 2007, and CEO since 2023: before that he held various financial positions within Gamma, culminating in being CFO: so he has a lot of financial experience, but not in other areas.

The CFO Bill Castell was previously CFO at Ovo Energy and Virgin Media, so he had prior telecoms experience. He is an accountant, and was previously a Deloitte auditor and investment banker with Goldman Sachs. He is on the board of the UK Financial Ombudsman Service, a public body that handles consumer complaints, which is helpful as it probably gives him a close connection to the UK consumer to understand their issues with the products and companies in the UK financial sector: which is helpful for his customer focus.

The chair of the board Martin Hellawell is a veteran of ComputaCentre, and SoftCat, leading it to IPO in 2016. The company has continued to be successful to date. Softcat resells IT infrastructure solutions (cloud computing), and many associated IT services: so he is very experienced in the cloud computing world and no doubt has good connections.

The CTO Colin Lees was previously Chief Technology and Information officer at Openreach: the network business part of BT (British Telecom) so has significant telecoms and network experience.

Some other board members have M&A experience, e.g. Xavier Robert and Shaun Gregory, and an M&A committee was formed in 2024 to find and vet acquisition targets.

The board are not paid excessively: with the CEO having a possible total pay (base salary, bonus, pension, and value of options) award of £3M assuming a 50% share price appreciation, with a minimum pay of £0.5M. In 2024, the CEO and CFO took home about 3.5% of Gamma profits after tax, in a year where revenues grew 11%.

Appraisal

1.    Free cash flow plus growth.

Owner earnings averaged over 2023-2024 are £74M. At the current market cap of £920M (share price 1000p), this is an owner earnings yield of 8%. Revenue CAGR has been conservatively estimated above at about 5%/year, for a total return of 13%/year. However, I expect that Gamma’s organic growth will be higher than this, because of the larger contribution from the fast growing German market: and because the German government is embarking on a massive rise in military spending due to the situation with Ukraine and Russia, which should help the German economy.

Given Gamma’s 90% recurring earnings, and rating of 13x P/E at the moment, which would be expected for lower quality companies than it, I think that there is limited downside. There is also the potential for a re-rating for the stock by the market, especially if earnings growth surprises to the upside. Given the highly cash generative nature of the business, and current low rating, there is also a small chance of a private equity takeover bid for the company.

Disclaimer: this is not investment advice, and is for informational purposes only.

Disclosure: the Real Worth Stocks model portfolio holds a long position in Gamma Communications (GAMA). At the time of writing, this was 8% of the portfolio, the 5th largest position.

Portfolio performance

Total portfolio performance year to date to 30th September 2025 is +33%, and the last 12 months is +44%. The S&P is up +14% year to date, and +19% in the last 12 months.

Buy recommendations summary:

Buy 1: a special situation cash shell with significant net operating loss carry-forwards, with a large private equity firm helping it to find a suitable acquisition. Potential for multiple upside based on previous similar situations, and the 2nd largest portfolio position

Buy 2: A US bank with strong returns on equity and high double digit growth, and a structural cost advantage, trading on 11x earnings

Buy 3: A palm oil company with 1/4 of the market cap in net cash, trading at 7x earnings, that has just been promoted to a higher index, under new management with improved capital allocation.

Buy 4: a telecoms company at a 5-year low in share price due to mostly temporary factors, with 90% recurring revenue, growing, with >20% return on equity/invested capital.

Buy 5: Another palm oil company with excellent capital allocation, trading at 9x earnings, with current high palm oil prices leading to record profits.

Portfolio position sizing:

The four biggest positions in the portfolio make up just under 75% of the portfolio - the chart below shows all position sizes:

The next chart reveals the portfolio composition: all stock names and the position sizes:

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NewPrinces (NWL) listed on the Milan stock exchange in Italy, have achieved a 42% CAGR in revenue since 2016 through acquisitions and growth, but are rated at 6x EV:EBITDA, below comparable food producer/supermarket competitors. Management execution is critical here: the thesis is that they will most likely continue their track record successfully buying and integrating food manufacturing businesses e.g. Princes. Another critical part is that they can successfully integrate and turn around their July 2025 purchase of the slightly loss-making ~1000 stores of Carrefour’s Italian business, leading to continued growth in the overall business and stock price. Management are founder-owner-operators, owning 41% of shares (economic interest), and 56% of the total voting rights, and have a clear vision of vertical integration in the food industry: from food processing to wholesale/retail distribution, developing new products, and driving operational efficiency and cash creation in their businesses. Downside risks are limited by the company’s strong balance sheet.

Business Model

NewPrinces (previously called Newlat) is a fascinating business due to the hugely ambitious founder-led management: the Mastroli family: founder Angelo Mastrolia, his son Giuseppe Mastrolia, and his daughter Benedetta Mastrolia. The founders have taken the company from owning only the Guacci pasta factory in Italy in 2004, to owning all the brands in the graphic below. Significant recent acquisitions include:

• 2014: Centrale del Latte d’Italia (Italian dairy): cost ~€30M, loss making when purchased, and turned around to become profitable.

• 2021: Symmingtons (UK instant noodles etc.): cost £53M, at 5.7x EV/EBIDTA

• 2024: Princes (Fish, tinned goods.): cost £700M, at 0.39x P/S and 4.2x EV/EBITDA.

• Note that this does not include three acquisitions made in 2025: including the transformative acquisition of the ~1000 stores of Carrefour Italia: more on these later...

NewPrinces Business Strategy up to 2025 (pre Carrefour Italia acquisition)

1. Operate its business efficiently to maximise cash generation: (fully utilise factory capacity, minimise working capital, etc.)

2. Use that cash for acquisitions: (plus also using debt, and occasionally equity) to acquire other food production business, with associated manufacturing plants and brands: often from distressed sellers

3. Integrate acquisitions into the existing businesses to generate more cash: by realising economies of scale, cross selling products, and developing new products to fill factory capacity, especially private label/customer owned brand, all of which generates cash: which can then be used for further acquisitions and growth.

An example of working capital improvements is shown by the acquisition of Princes: with a potential £400M of working capital improvements identified, with £140M delivered so far - by increasing DPO: (the number of days that payables are outstanding), to better align with competitor norms. DIO (days inventory outstanding) can also be further optimised - to hold inventory for less time, according to NewPrinces.

Carrefour Italia acquisition (July 2025)

A hugely significant pivot in strategy, in June-25 was the purchase of the slightly loss-making entire Carrefour business in Italy as shown below: 1027 supermarket stores for an equity value of €1, but an enterprise of value of €1B: including €420M of real estate assets. This is expected to complete in Q3 25. With revenues of €3.7B (90% from food sales), this doubles the size of NewPrinces, after already doubling 12 months ago when buying Princes.

The graphic below shows Carrefour Italia locations and market share in Italy.

NewPrinces have communicated a new group strategy as in the graphic below. Angelo Mastrolia, NewPrinces founder and CEO, said in his interview on the Carrefour acquisition, that they were open to additional acquisitions in logistics and distribution, in order to form a multi-national conglomerate. This is a major change in strategy for NewPrinces, occurring with this acquisition. Interestingly, on the day it was announced the stock closed down 9%, but the next day and subsequent days, recovered all of its losses and has since gone up further: showing disagreement between investors about the the merits of this move but an overall positive consensus.

Angelo Mastrolia paints his vision of vertical integration for Carrefour Italia and NewPrinces as follows:

He also plans to revert to using the GS brand in three years time after refurbishing the Carrefour stores: this brand the one used by the stores that Carrefour bought when they entered the Italian market in 1993, and then they later phased it out in 2010. Other plans are to:

• Focus on home delivery, since NewPrinces already has a strong logistics network in large cities in Italy.

• Serve hotels/restaurants/cafes more effectively, through the combined NewPrinces and Carrefour Italia logistics network

• Offer more private label products for sale in the supermarkets

Product ranges:

NewPrinces Dec-24 product ranges with revenues for each, prior to the Carrefour acquisition, are shown below:

2024 EBITDA margins range from 6%-14% depending on product type; a helpful table is given in the NewPrinces 2024 annual report on page 297, with the drinks and fish EBITDA margins being about 4%-5% (from the Princes acquisition) - these are likely to improve over time as NewPrinces improves the efficiency of the Princes business.

Competition and Market

The food production business is quite competitive. A risk is that a competitor may arise with greater economies of scale, and/or better distribution than NewPrinces, and reduce their sales volumes or margins in a particular food category. NewPrinces manages this risk by:

1. Remaining relevant: continually innovating to introduce new products to follow marketplace trends

2. Diversification by product type: This continues at pace with expansion by acquisitions in 2025, into baby formula, and alcoholic and non-alcoholic drinks.

3. Geographically diversifying (into Italy, Germany, UK, etc.) where different competitors are dominant in different geographies

National Brands vs Private Label/Customer Owned Brands

A brief explanation of national and private label/customer owned brands:

Products from national brands such as Heinz ketchup are purchased by a retailer for sale, but owned and manufactured by another company. The retailer benefits from the advertising that the brand owner/manufacturer does, and can sell the branded goods at a high price point because the customer wants that specific product, but this also means that the brand owner has a strong negotiating position in terms of the price that the retailer pays to stock their brands: so profit margins for the retailer can be squeezed by the brand owner/manufacturer.

Private label on the other hand, involves a retailer creating a brand that it owns, but which is manufactured by a third party manufacturer: most of NewPrinces revenues come from this. Historically, this has been done on less premium/lower cost goods. Customer Owned Brands (COB): there is an industry trend for retailers to also create their mid level and premium food product brands called COB by NewPrinces. For these brands, NewPrinces states that price is not the most important factor, but comes behind product quality, innovation and service. Their COB outperform national brands in terms of quality and perception, in the customers eyes, but at a lower price point, and for the retailer, allow them to capture more of the value when the products sell.

NewPrinces state that they have signed 2-5 year agreements with supermarkets, to produce COB in order to develop longer term relationships with them: vs the typical short term manufacturing tenders used in the industry. This shows that they have some competitive strength: that the retailers are willing to lock into these longer term contracts.

Economies of scale/low cost producer competition: that NewPrinces may not be able to be as competitive on price as larger competitors: this risk is mitigated by the constant acquisitions and actively scaling up the business. Revenue has compounded at a CAGR of 42% in the last 9 years, mostly through acquisition, and NewPrinces is now a €6.9B revenue business. They also seek to fully utilise their plant capacity, to exploit the operational leverage of manufacturing and reduce costs.

Moats/barriers to entry and exit:

Barriers to entry: Due to the high capex requirements to build food production facilities, the likelihood of their business being significantly disrupted by a competitor is low - it is very hard for a competitor to drive NewPrinces out of business. This is principally because although a competitor may compete successfully with NewPrinces in one product line or category, they are sufficiently diversified by product type and geography that this could not threaten the overall business. As NewPrinces scales, they have also increasing advantages in cross selling products across distribution channels, and increased bargaining power with raw material suppliers. They are building their economy of scale advantage as they grow revenues and make acquisitions.

Barriers to exit: competitive exits happen in the food sector mainly by selling out plants to competitors. Food manufacturing businesses have high fixed costs and a lot of invested capital in their factories. Therefore, when a plant/family of products is unprofitable, it is much easier for a company to sell a loss-making plant, than to incur the cost, psychological pain, and reputational damage of shutting it down, laying off all staff, and selling/remediating the land the factory is built on - which is at least a 1-2 year process. There is also a political cost for the company of shutting down an operation: this can be clearly seen by protests when closures are publicised in advance, as was the case in Diageo Italy. Therefore, when a food business line and associated food manufacturing plant is consistently unprofitable, it is better financially and reputationally, for the company to sell it rather than shut it down. Since they are a forced seller in this situation, a low price is typically achieved, well below the replacement cost of the assets - which is an opportunity for NewPrinces. It does not build factories: it just buys them below replacement cost typically from distressed competitors. Typically, these factories are running at only a fraction of their capacity (which is why they are loss making) and so if NewPrinces can fill them to capacity, perhaps by bringing in other products, or increasing sales volumes, they can make them profitable again.

NewPrinces has a great track record of taking advantage of the situations where poorly run competitors wish to exit their businesses, and have purchased multiple loss-making businesses from competitors, and turned them around to profitability. This track record indicates that a) operational execution in this industry is key, and therefore that in order to confidently predict the future track record on a company, an investor should look for continuity of management personnel: so that they know that operational excellence will continue into the future. NewPrinces is very strong in this regard, with it being a family owned and operated business: the founder Angelo Mastrolia is only 61 years old, and the second generation of the family (Giuseppe and Benedetta) are leading at board level, and in their late 30s/early 40s.

Capital Structure

NewPrinces has a single class of shares, but in quirk of the share structure rules, if shares are held by the same person for more than 36 months continuously, then the voting rights are doubled. Accordingly, Angelo Mastrolia has 41.4% of the shares but 58% of voting rights for NewPrinces, which had a net cash position at year end 2024. In Feb-25, it issued €350M in bonds with 6-year duration, at 4.75%, at par value. After the Carrefour acquisition and two others in 2025, it will have net debt of 1x EBITDA, about €330M.

Capital Allocation

Management have allocated capital primarily to acquisitions: and this being a key part of their strategy, is worth a close look to see if they are creating value or not.

Major acquisitions include:

1. Princes Group in Jun-24 (from Mitsubishi), for €700M (€650M cash, €50M stock), to repay the loan that Mitsubishi had made to Princes Group: it had €2B revenues with adjusted EBITDA of €118M. Since acquisition, NewPrinces significantly reduced the amount of working capital in the business, by about €179M, effectively reducing the purchase price by releasing cash from the business. They commented that part of this was achieved by lengthening the days until payment of payables, to industry standard norms.

2. Diageo Italy: in Dec-24 Diageo announced that it would shut its sole Italian plant in order to focus on stronger Northern European markets. In June 2025 NewPrinces bought Diageo’s Italian operations. The price has not yet been made public since the transaction is being finalised, however the annual revenues were €229M with EBITDA of €20M and net profit of €18M. It’s therefore too early to tell whether NewPrinces obtain a good price: although this is highly likely since Diageo had decided to close and liquidate the business, which would have not returned much if any cash to Diageo, so NewPrinces had a very strong negotiating position.

3. Kraft Heinz Italian baby food business: in July 2025 NewPrinces bought a manufacturing plant in Latina, Italy, along with various baby food brands, for €120M, at 7.1x EV/EBITDA. (In 2015 NewPrinces also had bought an infant formula factory from Kraft Heinz Italy).

A key point regarding capital allocation is that NewPrinces have not had to issue much debt or equity in order to grow their revenue at a CAGR of 42% from 2016-2025.

Princes business unit: listing on the London Stock Exchange in October 2025

NewPrinces are planning to list the Princes business unit on the LSE in the UK, in October 2025, aiming to raise about £700M, which will likely be deployed in further acquisitions and prompt further growth. This will also bring greater awareness of and publicity to the company in the UK and across Europe.

Durability, Quality & Risks

NewPrinces core business is quite durable: they produce food: private label and also branded consumer staple goods which will always be in demand. Much of their business is private label, but they do also own some consumer brands.

The new acquisition of Carrefour supermarkets in Italy is also a durable business, with no risk of obsolescence. However, there are some risks due to the aggressive acquisition strategy pursued by NewPrinces, which are discussed below.

Quality of earnings:

Owner earnings are calculated as the cash earnings that can be taken out of the business or reinvested, according to Warren Buffet’s formula: net profit + non cash expenses (e.g. depreciation, amortisation) - cash expenses not included in net profit (e.g. interest paid, taxes, capex).

I have calculated owner earnings for 2019-2024 as below. The deviations between them are due to working capital movements, but on average they correlate well. Owner earnings are actually higher than reported net earnings over the period by €57M, due to the working capital reductions in 2024 after the Princes acquisition.

NewPrinces gross and operating margins are shown below: gross margins are between 15%-20%, and operating margins 3%-5%. This will likely change due to the acquisition of Carrefour Italia, which has been operating at EBITDA margins of about 1.8% in 2024.

Risks

NewPrinces fails to turn around Carrefour Italia to make it profitable: and so losses in the supermarket business offset profits in the food business, reducing overall profitability and cash generation. It made a loss of €87M on sales of €3.7B in 2024.

This is the most significant risk in my opinion, because of the large size of Carrefour Italia: which has revenues of 54% of the total business. It is a risk of a) business strategy, and b) execution.

a) Business strategy risk: this is the risk that it is the wrong strategy for NewPrinces, and even if executed really well, may still not pay off because they are choosing to be part of a very competitive industry. However: in chosing to buy Carrefour Italia, NewPrinces is following the model of Migros and Coop in Switzerland, which are vertically integrated food producers and retailers - showing that this strategy can be a successful model. In the case of Co-op (a business owned by members rather than shareholders), they target a maximum of 5% EBITDA margins: passing on savings to customers to avoid exceeding this level, which is much higher than the current 1.8% EBITDA margins that Carrefour Italia has in 2024: this shows that there is room for improvement in profits, while achieving commercial success. NewPrinces has also publicly committed to plans to ensure that it does not undercut other distributors of its products by selling them cheaper in the Carrefour Italia supermarket, than they are listed for in other supermarkets. Buying Carrefour Italia to enter supermarket retail is significant pivot in the strategy for NewPrinces, so it remains to be seen if this will be successful.

b) Execution: this is the risk that the acquisition is a good strategy: but will not be executed well by management. NewPrinces management have not managed a large supermarket before: and there is a saying that retail is in the detail: so will they be able to successfully manage the supermarket well, and make it profitable, if they lack the experience to know which details to focus on for good execution? Retail is an extremely competitive business, where your competitors can see everything that you are doing in stores daily - nothing is hidden - so there can be no trade secrets as a source of competitive advantage. The execution risk in my opinion is the single biggest risk since it is somewhat hard to quantify. Reducing the risk financially, is that NewPrinces took on Carrefour without taking on debt, and also Carrefour are investing €237M in the business to help NewPrinces make it profitable.

This truly is a transformative acquisition, that will likely either be a success, or else a mediocre acquisition that dilutes NewPrinces returns, and distracts its management. My opinion is that it will be a success is based on:

• The track record of the management at ensuring operational efficiency of their many manufacturing plants, which definitely requires attention to detail

• Their experience with managing complex supply chains and many product lines

• Their total commitment to the success of the business since almost all of their family wealth, and time and attention is invested in NewPrinces.

Therefore, I think that they will be able to turn around Carrefour Italia. Their strategy for doing so has been discussed above in the ‘Carrefour Italia July 2025 Acquisition’ section.

Growth

Growth at NewPrinces has been at a revenue CAGR of 42% from 2016-2025, driven mostly by acquisitions, but also some organic growth in their businesses.

In the period 2016-2024, they grew revenue from €0.3B to €1.6B, while in cash terms, spending only €93M of cash to 2024 to buy the assets acquired.

For 2016-2025, the cost of the growth of revenue to €6.9B also includes an as yet unknown amount on Diageo Italy, €200M of cash on Carrefour Italia and an unknown figure, less than €120M, on Kraft Heinz Italy. Therefore, they have created a lot of value with the acquisition strategy over time.

For Carrefour Italia, there is significant scope for growth and operational improvement, with sales per square meter at €5.7k, vs the Italian supermarket average of €7.7k. If they closed half of this gap by improving sales using the existing retail floor space, this would be a sales increase of 18%, which would hugely increase profits due to the operational leverage inherent in a retail business (with an increase in revenue, since most costs are fixed, this results in a disproportionately large increase in profits).

NewPrinces forecast a CAGR of 3% organic growth to 2030, in line with market trends, without any synergy benefits from combining their recent acquisitions. They are also targeting a 10% EBITDA margin by 2030, up from 6.6% in 2024, driven by, ‘synergies, mix improvement, brand business contribution increase and operating leverage.’ These figures were published before the Carrefour Italia acquisition.

Management are actively involved in M&A discussions with multiple other businesses as below. For instance, these two acquisitions would increase revenue by 10% each.

Environmental, Social and Governance Factors:

Environment:

NewPrinces has a net zero plan, with the ratio of scope 1 and 2 carbon emissions declining over time. 15% of the board’s variable bonus is tied to this goal. NewPrinces was ranked as being among the, ‘most climate-conscious companies’ and received the ‘Sustainability Leader,’ award from Statistica.

Overall, climate risks were judged to be of low significance to the profitability of the business.

Sustainability targets for Newlat Food Group:

2028: 100% sustainable palm oil used

Princes Ltd targets:

100% renewable electricity: 2032

Reduction of 50% scope 1 and 2 greenhouse gas emissions: 2032

Reduction of 50% scope 3 greenhouse gas emissions: from purchased goods and services, upstream transport and distribution, and waste generated in operations, and reduction of 90% by 2050

100% sourcing of MSC-certified tuna for Princes brand in the UK and Netherlands: 2025

100% FSC certified paper and cardboard: 2026

Social:

NewPrinces employ 13,000 people in Italy, and 18,000 worldwide, post the Carrefour Italia acquisition, with 82% of their workforce covered by a collective bargaining agreement. Exceptions to this are in the UK and Poland where less than 100% of workers are covered by an agreement. In 2024 at NewPrinces there were zero deaths, and 15 work-related injuries per 1 million hours worked, which compares to about 11 per million hours for the UK: source is the UK Health and Safety Executive annual statistics 2023 report.

Governance:

Reading the annual report, I see a stricter regulatory environment compared to other countries in Europe with a lot of legal compliance regulations for Italian companies. Presumably this was put in place by the Italian Government, to combat money laundering and organised crime in Italy.

For instance, NewPrinces has:

• An internal control and risk management system (ICRMS), which is itself also inspected by the internal audit department, by making regular evaluations of it through internal audits. Internal audit department head Fabrizio Carrara reports directly to the board.

• Organisation, Management and Control Model in accordance with Italian legal decree 231: which includes documentation of the performance of controls. Nobody can operate an entire business process independently. A 2 person supervisory board also sends a written report to the board on how model 231 is being implemented in every company department.

• A board of Statutory Auditors, voted on by the shareholders

• External audits by PwC: term 2019-2027.

Key external audit matters in 2024 were:

1. Indefinite-lived intangible assets and impairment testing (product brands): these are worth in total about €47M: which is 5% of the balance sheet, so is relatively insignificant: and PwC found no issues with the valuation of these assets.

2. Business combinations: acquisition of the Princes Group: this was significant as a sum of €700M was paid to the seller Mitsubishi for Princes, checking that the actual accounting for this business, was as described in the financial statements, verifying the due diligence performed, and checking the value of assets and liabilities of the acquired business, and the accuracy of disclosures provided in the NewPrinces financial statement notes. Nothing of concern was found by PwC when this was done.

The overall impression I have when reading about the governance controls at NewPrinces is that they are strong and effective. In addition, the management are very focussed on cash generation rather than creating accounting profits. They have adopted an unusually aggressive depreciation policy for land and buildings, depreciating them over 10-33 years. Normally, businesses do not depreciate land. This may be to reduce their taxable profits, while still maintaining good cash generation - and is a sign that management do not care about maximising taxable profits to look good to investors, bur rather are focussed on owner earnings/cash management.

Appraisal

NewPrinces is difficult to value on a free cash flow plus growth basis, due to the multiple acquisitions, some of which are in progress. However, it can be valued on a price:book basis, and an EV:EBITDA basis.

Price:book: as of end of FY2024, NewPrinces has a balance sheet with net current assets of €501M, and net non-current assets of -€198M, for net assets overall of €303M. The market cap is currently €1038M at the time of writing.

However, since FY24 end, NewPrinces purchased three companies: we don’t currently know the book price of the Diageo Italy or Kraft Heinz Italy baby food businesses. The Carrefour Italia business was purchased for an EV of €1B cash and debt free, but an equity value of €1 after accounting adjustments, with NewPrinces committing €200M to revamp the stores (and Carrefour committing €237M as well): and Carrefour Italia has €420M of real estate assets. Therefore, very little cash has been required upfront to purchase a business with annual revenues of €3.7B and EBITDA of €115M.

The book value of NewPrinces is therefore currently not known since we only have figures to the end of 2024, but the FY24 balance sheet likely understates the true value of their assets, because the replacement cost for their assets is at least €400M more than the book value (this is the accumulated depreciation to date on their assets: most of which is plant and machinery).

EV:EBITDA: This is a more useful way to evaluate NewPrinces company, than price:book.

NewPrinces is currently trading at 4.8x EV:EBITDA, based on the current EV, and Dec-24 year end EBITDA.

However, since then they have purchased three businesses: so we can calculate an updated EV:EBITDA number:

Starting with FY24 EV of €681M:

+ €1B for Carrefour Italia

+ €120M for the Kraft Heinz Italian baby food business

+ an unknown amount for the Diageo Italy acquisition: let’s assume NewPrinces paid a 8x EV:EBIDTA multiple for the business, for an EV of €163M.

= 681+1000+120+163 = €1964M EV.

NewPrinces said in the investor presentation on the takeover of Carrefour Italia, that the combined EBITDA including the existing businesses, Carrefour Italia, the Kraft Heinz baby food business, and Diageo Italy would be €330M in March 2025. Therefore, an up to date EV:EBITDA ratio is €1964M/€330M = 6.0x: this is before synergies are realised in the acquisition of Carrefour Italia. This is cheaper compared to a comparable food company: Valsoia S.p.A (VLS), an Italian food company manufacturing and selling drinks, dairy, ready meals, and tomato based sauces trades at 9.8x EV:EBITDA, whose revenues are flat over the last 10 years. A dataset of US grocery companies has an average EV:EBITDA multiple of 7.7x. Based on this, NewPrinces are priced slightly to significantly below the market comparators. Additionally, Carrefour Italia has accumulated losses of €874M for 2019-2023, which NewPrinces may be able to use to offset future corporate taxes on future profits from this business.

Criticisms of EBITDA and relationship to cash earnings for NewPrinces:

Charlie Munger has criticised EBITDA, calling it ‘bulls**** earnings' because it does not take into account interest, taxes, depreciation and amortisation or capex, so it generally overstates the cash earning power of businesses. We can examine NewPrinces 2024 EBITDA to see how it compares to cash earnings:

EBITDA = Earnings Before Interest: NewPrinces’ net interest bill was about €30M in 2024.

T = Taxes: in 2024, NewPrinces paid only €7.2M in taxes on a profit of €167M, because it was able to save €47M in tax, using accounting losses from the acquisition of businesses, to almost totally offset its tax liability: reducing its effective tax rate from 27.9% to 4.3%. It is likely that by acquiring Carrefour, it will be able to do this for two or more years into the future as well - so not including taxes in EBITDA has little effect.

DA = Depreciation and Amortisation. DA can be compared to capex to understand the true cost of maintaining the assets of the business. In 2024, NewPrinces charged €63M of depreciation and amortisation against profits, but only spent a net €20M on capex - so that is the true cash cost to the company. Since the EBITDA number does not include DA or capex: we have to subtract them both to get to cash earnings.

Working capital: working capital adjustments are not included in EBITDA either: and here in 2024, NewPrinces managed to reduce working capital by €172M, primarily in the Princes business. It is hard to tell, if this will be repeated in 2025 with Carrefour Italia: it is likely that working capital will be reduced as the product lines are optimised and inventory reduced, however: additional working capital may be needed to restock the supermarkets with the product lines that NewPrinces wants to sell.

Leases: we need to also deduct €19M of repayment of leases from the EBITDA to get to cash earnings.

To summarise: FY2024 EBITDA can be adjusted to cash earnings by:

EBITDA = €261M - €30M net interest - €7M taxes - €20M capex - €63M depreciation & amortisation + €172M working capital reduction - €19M lease payments = €294M cash coming into the business. (Note - for the Princes acquisition: the purchase price paid was €155M less than the net asset value: since this was provisional at year end 2024, it is charged against profits, so EBITDA is €294M - €155M = €139M.

Therefore, cash coming into the business in FY2024 is lower higher than EBITDA. However, management identified a €465M working capital position in Princes, compared to competitors who generally have a net negative working capital position - so more working capital may yet be released from Princes.

If they bring Princes to a zero net working capital position, then the net cash cost to NewPrinces for the acquisition will be reduced from €814M-€465M, to just €349M, for Princes, a business generating €118M in EBITDA in 2024, and with revenue of €2.1B. Additionally, the planned ~£700M listing of Princes on the LSE in Q3/4 2025, will allow NewPrinces to raise cash from it’s equity holding of Princes and use that money for further acquisitions and growth.

Conclusion:

NewPrinces has successfully pursued a model to date, of buying distressed food businesses and associated manufacturing plants from competitors, along with some profitable businesses, increasing their efficiency, releasing working capital diversifying and realising economies of scale, and using the cash generated, to reinvest in more acquisitions, creating a lot of value. NewPrinces are forecasting organic growth of at least 3% CAGR to 2030, plus 6.6% to 10% improvement in EBITDA margins (excl. Carrefour Italia acquisition).

In 2025 NewPrinces pivoted strategy to pursue vertical integration in the food industry, buying Carrefour Italia to move into retailing products in supermarkets too. Overall, it has achieved a revenue CAGR of 42% in 2016-2025 through mostly acquisitions. It is a family owned and controlled business, and management execution is key to the future success of the business. At an EV:EBITDA ratio of 6.0x, slightly below competitors, there is some margin of safety - which also comes from the relatively strong balance sheet of the company with net debt at 1xEBITDA post recent acquisitions: but a key question is: can management execute the successful integration of the large, transformative Carrefour Italia acquisition? The investment thesis rests on evaluating management’s operational track record to date in the food manufacturing industry, and hypothesising that their plans for vertical integration in the food business will work. Is this empire building or a brilliant strategic move? Time will tell: probably it will become much clearer by Q3-Q4 2026. The investment thesis rests on having confidence that management can continue to deliver operational excellence, and also execute further valued added acquisitions.

Disclaimer: this is not investment advice, and is for informational purposes only. While every effort has been made to ensure the accuracy of information contained within, no guarantee is given as to the accuracy of information or fitness for any purpose.

Disclosure: the Real Worth Stocks portfolio holds a long position in NewPrinces (NWL) at the time of writing.

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Alpha rejected an all-cash offer from Corpay (CPAY - listed on NYSE) on 5th May 2025, and is currently in discussions with Corpay about a possible revised offer.

It has grown organically since founding, to make 2024 profits of £123M/$168M, and yet is priced at just 14x earnings, despite growing at a CAGR of 31% in the last 5 years.

Investment Thesis:

Alpha Group International (ALPH) listed on the London Stock Exchange (LSE) is a fintech providing foreign exchange hedging and foreign bank account and payment facilities for corporations, institutions and alternative investment managers and companies which service them. It was founded in 2010, and earns a 30% return on invested capital. It is very cash generative, has 15% of the market cap in net cash on the balance sheet, and is priced at just 15x owner earnings (or 13x owner earnings after deducting net cash), with a very long potential runway for growth. However, it is currently priced as if it will deliver just a market-type return. Growth over the last 5 years has required no net additional working capital, so the growth finances itself.

Since the initial offer was rejected on 5th May 2025, indicated by the red arrow on the chart below, the stock has only moved up about 10% or so, indicating a low downside risk, should the takeover not happen. Corpay have until 7th July 2025 to make an offer or walk away - although this deadline can be extended if Alpha agrees.

Business Model

Alpha Group is a UK-listed fintech company, who have two main divisions:

1. FX risk management: managing foreign exchange risk for small and medium enterprise corporations, (48% of revenue), and for institutions such as pension funds etc. (22% of revenue). It earns revenue by charging commission on foreign exchange products such as forward currency contracts, option contracts, fx spot transactions, etc, and receipt of interest on client balances. This was the original division of the company when it was started in 2010, and when it has its IPO in 2017.

2. Alternative Banking: giving clients international payments and accounts through a service called Alpha Pay (30% of revenue). It earns revenue by charging fees on payments, and account maintenance fees, and receipt of interest on client cash balances. This division was started in 2020.

3. A third very small division acquired in Dec-23 is Cobase, a cloud based software which connects company’s various bank accounts in one interface (<1% of revenue). It earns revenue on SaaS (software as a service) fees.

Alpha split their earnings into, ‘underlying,’ and, ‘non-underlying,’ - the difference is that the non-underlying includes cash from client balances. After the steep rise in interest rates in 2022, interest on client balances went from ~25% of profit in 2022 to ~75% of profit in 2023 - see the grey part of the graphic below which shows this.

The former CEO until 2024, and founder Morgan Tillbrook is the single largest shareholder at 12% of the company (after recently gifting 1.64% of the company to the senior management team and his successor Clive Kahn) and has created a strong culture that the company does not attempt to predict the direction of the currency markets, but instead offers clients simple solutions to hedging their foreign exchange risks. He is stepping down as CEO at the end of 2024, and the current chair, Clive Kahn is taking over as CEO. He has committed to keeping his shareholding at a minimum of 10% for the next 3 years.

Alpha’s business model is to provide, ‘speed, responsiveness and reliability,’ to their clients, whether corporates or institutions seeking to limit their foreign currency risks, or else institutions who do alternative investment (e.g. private equity, etc.) who need to manage bank accounts and transactions in multiple currencies across the world in order to manage their investments. Alpha thinks that these customers are underserved by traditional banks: who use legacy systems, and are slow to open and operate accounts, and have generalised products, not specialised for the alternative investment market.

Competition and Market

Alpha operates in two main markets:

1. Providing FX hedging products for companies wishing to hedge their foreign currency exposure

2. FX hedging, plus alternative banking products for alternative investment managers/corporate service providers to them, to make payments and operate multiple foreign currency accounts, plus treasury management services.

Foreign exchange hedging market: Alpha state that 80% of the foreign exchange regulated market is banks, and 20% non-bank foreign exchange brokers. Banks typically offer generic advice on hedging - which is typically a small part of their business. The specialist foreign exchange brokers often offer more tailored advice, but Alpha asserts that they often sell their clients products that are more complex than needed, including ones that allow the companies to speculate on the direction of forex markets, aiming to profit on currency movements, rather than just hedge their cash flows to ensure that they neither lose or gain when exchange rates change.

Alternative Banking: Alpha’s customers are alternative investment managers and the corporate service providers and fund administrators that support them. Fund types are private equity, private debt, venture capital, real estate, infrastructure, and fund of funds. Their competition for this is almost exclusively banks. However, banks are typically built with legacy systems, focussed on a more general offering, and are slow to open accounts, and sometimes close them if they cannot earn enough profit from them.

Alpha state that there is therefore a gap in the market for a competitor such as themselves which can offer an easier, more responsible and reliable service. This claim is substantiated by the fact that they have grown their alternative banking business from zero when founded in 2020, to a 2023 revenue of £34M, at a 33% margin, with a 50% growth in customer accounts in 2023 to ~6500.

The table below shows key metrics for Alpha vs a one competitor; Record Financial (UK) and one company with some industry overlaps: StoneX (US) - both non-bank corporations. Alpha do not operate in the US where StoneX is located.

*Alpha Group revenue CAGR in table above is over 9 years, vs 10 years for the other companies.

Alpha, founded in 2010, is a much younger business than the other two, and has grown very fast. The revenue CAGR over the last 10 years is 49%, the last 5 years 37%, and 3 years 32%. Record Financial describes itself as, ‘A specialist currency and asset manager offering best-in-class products to large global investors,’ and was founded in 1983. It specialises in currency management for international clients, having $101B in assets under management in 2023. It uses a mixture of passive and active currency overlay strategies for investment managers. Active ones seek to profit from currency movement, by predicting the direction of the currency markets, and passive ones just to prevent gains or losses when investing in a different currency. This is a total contrast to Alpha Group: who specifically rule out trying to predict the direction of the currency markets (using active strategies) and are very critical of this. Their 2023 annual report states,

So we can see that: Alpha has a very clear and strongly stated philosophy and culture, that is not possible to predict the currency market: implements this by not forecasting it publicly, will not sell products which speculate on foreign currency movements, and believes that there cannot be ‘experts,’ in this area. This is a clear point of differentiation with their competitors.

StoneX is a US based global financial services company offering global payments, risk management and hedging, exchange traded and OTC product execution and clearing, and various other products. However, margins are small at 0.5%-2% over the last 10 years vs >30% for Alpha and Record; as only part of their business activities overlap.

In summary, Alpha is priced lower in terms of price: free cash flow, and has much stronger growth, and a better return on invested capital than these two non-bank competitors. Banks have not been included in this comparison, because foreign exchange hedging is only a very small part of their business typically, so their overall financial metrics do not give an accurate picture of their foreign exchange business, and so it is not a fair comparison.

One of their competitors Argentex (AGFX) recently nearly went bust and was taken over for just £3M/$5M. Their share price chart below tells the tale.

Argentex offered their customers, ‘zero-zero,’ credit lines, i.e. zero initial and zero variation margin requirements. This means that when a customer’s trade moves against them, Argentex must post margin against it. In the chaos surrounding the Trump tariff announcements in early April 2025, with swings in major currencies, Argentex was forced to post margin to cover its customers deteriorating positions, and ran out of cash, and was forced into a sale for a pittance.

Alpha does not offer zero-zero credit lines, and hedges its foreign currency exposure, so this will not happen to Alpha.

Capital Structure

Alpha Group has a capital structure with net cash and no debt, and their stated policy is to continue this to maintain a strong liquidity position. Alpha’s CEO Morgan Tillbrook currently owns about 14% of the company: and although he is resigning effective end of 2024, has promised to hold a minimum 10% shareholding for the next three years. The CEO designate Clive Kahn has wealth from selling other payments business, has promised to substantially increase his stake, currently under 2%, and is buying shares periodically in the open market.

Alpha incentivise their staff in the various geographical offices in an interesting way. For example, when a new office is set up, e.g. the Canada office, Alpha will set up a subsidiary company for that office, and the staff will have performance related share options to potentially own up to 25% of it, depending on meeting revenue and profit targets. Alpha owns the remaining 75% outright. Then, if revenue targets are met - they are typically 20% growth per year - the staff get the right to have their options converted into Alpha shares: and in return Alpha gets back the ownership of that part of the subsidiary. If targets are not met, the options expire, and Alpha gets back the ownership without having to give shares to the employees. The CEO of Alpha has an employee ownership philosophy, because he wants the employees to have a stake in the business and be incentivised to grow it.

Capital Allocation

Reinvestment in the business: Alpha allocates most of its free cash flow by reinvesting in the business for organic growth, and has just completed opening various offices around the world in key jurisdictions, except the US. It has achieved a 10-year average return on invested capital of 25%, so this is a good choice. The strategy stated in the 2023 annual report is to invest now more in front office staff in these offices, to drive increased sales and new customer acquisition.

Dividends: Alpha has a progressive dividend policy: but in 2023 yielded about 0.75%, so is paying out 7% of net profit in dividends: so fairly minimal. Over the last 7 years it has paid out only about £22M in dividends, of £238M in accounting profits: so about 11% of earnings.

Share buybacks: Alpha authorised a £20M share buyback in 2023, which is 20% of net profits.

Retained earnings: Alpha considers it important to have a strong balance sheet to inspire confidence with its counterparties, and provide funds for organic growth, so it keeps a net cash position. The majority of earnings are retained - but Alpha does not need all of it’s retained earnings. It will be interesting to see what is done with these.

Acquisitions: Alpha made it’s first ever acquisition in 2023, of 86% of Cobase (a SaaS treasury management software company) for £8.6M plus additional consideration earn out to buy the remaining 14%, over 2025-2028 - so this is not a big part of their capital allocation strategy.

The CEO states that they are often shown opportunities to buy competitors in the foreign exchange regulated market space (companies that provide a marketplace to buy and sell foreign exchange products): but do not complement Alpha’s culture and do not add value to the business.

Durability, Quality & Risks

The durability of Alpha’s business depends on the overall economic environment, and their ability to continue to capture business from corporations and institutions: for both alternative banking; making international payments and having international bank accounts, and also foreign exchange hedging; hedging their currency risks by buying foreign exchange hedging products.

Approach to customers: Relative to it’s competitor Record Financial and other competitors: Alpha does not seek to make currency profits for it’s customers by speculating on the direction of the currency markets. This means that it is less likely to disappoint its customers in making losses - active speculation will inevitably sometimes lead to losses for customers, causing them to withdraw their business - so this approach ultimately damages customer retention, and reputation in the marketplace. For instance, after the 2007-2008 financial crisis, Record Financial lost business as customers stopped using active overlay strategies to try to profit from currency movements.

Customer retention: Alpha takes an approach to its customers, that focusses on acquisition of new customers, more than increasing business with current customers. Staff are incentivised to sell simple rather than complex hedging products to customers, by Alpha setting lower rates of commission on the more complex hedging products, and higher rates on the simple ones. This culture is driven by the founder CEO who strongly believes in this approach. Further: no revenue targets for existing customers are set, to avoid incentivising Alpha to sell them products that they don’t need. This long-term thinking approach to build customer relationships and trusts is distinctive in the industry. As Charlie Munger said, ‘Show me the incentives, and I will show you the outcome.’

Quality of earnings:

The graph below shows owner earnings that I calculated (net profit after tax, plus all non-cash expenses such as depreciation and amortisation, i

ncluding for leases, minus all real expenses, e.g. capex, acquisitions, lease payments and taxes.) The swings of owner earnings above and below net profits in 2019-2020 are due to the timings of working capital movements.

Alpha Financial: owner earnings vs net profit:

Net working capital movements: when these are summed over 2019-2023 it is just an increase of just £0.5M - i.e. pretty much zero: which shows that over time, the business does not need any working capital to grow. This is excellent, because it means that the business can scale without absorbing working capital: which means earnings can be redeployed in more fruitful ways for shareholders. Net profits pull ahead of owner earnings in 2022 and 2023 due to increased spending on capex, and also the acquisition of Cobase in 2023.

Since owner earnings are calculated after all capex spending and acquisition spending is deducted, the figures represent the truly free cash flow, that can be extracted from the business, after all these investments to maintain and grow the business have been made.

It can be seen that the business is extremely cash generative: this is because it only requires some leased office space, IT systems and some software, and personnel to operate - all of which scale with revenues and do not require fixed upfront investments.

Therefore, the quality of earnings is fairly high.

Sources of earnings:

Alpha earns money in two main ways:

1. Underlying business (commissions on foreign exchange products, fees for opening and operating foreign currency bank accounts, and making foreign currency payments)

2. Interest on client balances. Under the terms of Alpha’s electronic money licence from the UK financial regulator the FCA, it is prohibited from paying interest earned on client balances, to the clients: as it is licenced as a payment service, not a bank.

The underlying business has been discussed above: but interest on client balances depends on interest rates which are set by central banks, and are totally outside Alpha’s control. When rates were hiked fast in 2022 around the world, Alpha’s earnings from interest on client balances increased hugely to become 75% of profits. This can be seen by comparing underlying earnings (excluding interest on client balances) for 2023 of £43M in the graphic below, with profit before tax of £115M in 2023, which includes interest on client balances.

Therefore, the quality of these earnings is much lower and will be more variable. However, they can be predicted depending on the client balances, which have been growing rapidly over time. Alpha also hedged these at 3% for a period of time which has now expired.

I count these earnings as part of Alpha’s earnings, as I think that it is very unlikely that interest rates will return to the all-time lows seen in the last decade up to 2022, and the trend of growing client balances will continue, so even if interest rates are cut to 2-3%, I would expect Alpha to continue to earn interest on client balances at roughly the current levels, or increasing levels over time - because of the volume of client balances is increasing over time.

The graph below shows where earnings come from for Alpha, and the margins for the two main divisions, and the businesses within them. Most of the corporate business is in the UK.

Risks:

The disruptor being disrupted:

Alpha Group is a disruptor in the markets that it operates in: of course disruptors may themselves be disrupted. I view the biggest risk to their business as being a well-funded competitor, attracted by the high returns in their industry, essentially copying their business model, and reducing the margins that they can earn on their business.

Offset against that are two factors:

1. First mover advantage and customer stickiness: the services that they provide: particularly the alternative banking services, should have high customer retention rates. These are mission critical services, akin to a core processor software provider that provides the backend software for banks to operate their systems, and are highly complex to replicate: so once the have gained customers in alternative banking, I think that Alpha is unlikely to lose them. The foreign exchange hedging customers are likely to be less sticky, as these services are easier to duplicate elsewhere.

2. Valuation of the business: see the appraisal section at the end. The current valuation almost totally discounts any growth in the business, as there is an owner earnings yield of 8% - see the appraisal for details of this - similar to a market-type return. Since it would take time for a fintech competitor to enter the business and build up relationships of trust with the customers, there would be plenty of warning of this in advance. Even if growth slows as a consequence, the existing business is sufficient to support the current valuation, so I see little downside risk from this at the current price.

The CEO Morgan Tillbrook is leaving the business at the end of 2024. However, Clive Kahn who is taking over has been with the business as non-exec chair for a number of years, and inherits a strong culture, and also has a lot of industry experience, so while not ideal, I am not very concerned about this.

Growth

There are two main divisions in Alpha:

1. Foreign exchange hedging (currency risk management for institutions and corporates): grew by 10% in 2023.

2. Alternative Banking: (global payments, and foreign currency accounts for alternative investment managers and the companies who service them): grew by 18% in 2023.

Foreign exchange hedging: this is the business that Alpha started with in 2010, and it represents 69% of revenues in 2023.

Alternative Banking, started in 2020, now represents 31% of revenues. Given it’s structural advantage over banks, in that it is a specialist provider focussed on alternative fund managers, that are served poorly by banks, I would expect to see it continue to take share in its market over time.

Overall: Alpha has grown top line revenue at a CAGR of 45% over the past 9 years: however it still only has a <1% share of the £200B worldwide foreign exchange regulated market.

The graph below shows where the Alpha earnings come from and how they grew in 2023.

Environmental, Social and Governance Factors:

Environment:

Alpha has a minimal environment impact, because it does not manufacture any products. In their carbon emissions breakdown, the vast majority of emissions comes from employee travel: as they have been setting up offices around the world requiring staff travel.

Social:

Alpha does not have any issues with trade unions and there are no mention of these in the annual report. They do have a high performance culture and their staff work long hours, but has very favourable impressions of the company on Glassdoor.

Governance:

Key audit matters in the last audit were:

1. Existence and accuracy of revenue - this was verified.

2. Accounting for growth share schemes - this required the previous year’s financial statements to be restated, but this was done and the restated financials have been judged acceptable. There was an accounting issue of a mistake being made around the accounting of share based payments for growth share schemes, which was a key audit matter. This has now been rectified, and also the accounting treatment of share based payments changed which had the effect of increasing earnings. in 2023, the size of the internal audit team was also increased at Alpha - this function was created in 2022.

3. Appropriateness of Credit value adjustments (CVA) - identified in 2022, and no longer considered to be a key audit matter in 2023 after evaluation

Fair value of growth shares - identified in 2022, and no longer considered to be a key audit matter in 2023 after evaluation

A new chair has been appointed: Dame Jayne-Anne Gadhia. She is a chartered accountant, and helped found Virgin Direct in 1995, setting up the Virgin One ccount, then was CEO of Virgin Money for 10 years, leading it to IPO. She then set up her own fintech called Snoop, sold it to Vanquis Bank in 2023. She is a lead non-exec director at HM Revenue and Customs in the UK.

Overall, given the failure to detect internally the share accounting issues, I would say that the governance needs to be improved, specifically their accounting and internal audit functions. With the establishment of the internal audit team in 2022, this has been addressed: and is a matter that I will pay close attention to going forward.

Appraisal

1. Free cash flow plus growth.

Free cash flow for Alpha was determined by calculating owner earnings as described in the section on earnings quality. Owner earnings were calculated as £88M in 2024, after all capex and acquisitions had been deducted: so any growth seen in the company has been fully paid for. This is an owner earnings yield of £88M owner earnings / £1336M market cap = 7% owner earnings yield. If we invert this ratio, we get a price:owner earnings of £1336M/£88M = 15x. Revenue growth has averaged 45% CAGR over 10 years, 37% CAGR over 5 years, and 32% CAGR over 3 years. If we conservatively assume a 14% growth rate - which is about the rate of growth in the underlying business in 2023, this would be a return of 7% owner earnings plus 14% growth, for a total return of 21%. Given the current small size of Alpha relative to the markets it operates in, there is a very long potential runway for growth. In addition, they have just purchased Cobase, and also started a fund finance business, which could contribute to growth when they become large enough to be significant to revenue.

If we look at the return of ALPH stock since IPO in 2017, it launched at 196p and is currently trading at 3080p, for a CAGR of 41%: a little above the revenue growth of 33% CAGR in this period.

In addition, there is the potential catalyst of the takeover discussions with Corpay (CPAY)

Disclaimer: this is not investment advice, and is for informational purposes only. While every effort has been made to ensure that the information contained within is accurate, no guarantee is given as to the accuracy of the information, or its suitability for any purpose

Disclosure: the Real Worth Stocks model portfolio holds a long position in Alpha Group International (ALPH) at the time of writing.

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Investment Thesis:

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2024 returns:

Real Worth Stocks time-weighted portfolio return +15%

S&P 500 return +25%

FTSE-250 in the UK return +8%

Real Worth stocks portfolio 15% total gain breakdown:

• 40% unrealised capital net gains

• 50% capital distribution from Asian Energy Impact Trust (AEIT) liquidation

• 10% dividends

Unrealised capital gains:

Two of the largest unrealised capital gains came from stock picks in November and December 2024. Three other stocks contributed most of the rest of the capital gains, one of which was Axos Financial (AX).

This performance all came from stocks outside the S&P 500 except for one: Ulta Beauty, which makes up only 1.4% of the portfolio.

Comparison with the S&P 500:

The S&P 500’s 25% gain can be broken down into a 50% gain from the ‘Magnificent Seven,’ stocks, and 50% to the rest of the stocks in the index as below.

The S&P 500 P/E ratio at the end of 2024 is about 28x, up from 25x at the start of the year. About 50% of the return of the S&P 500 has come from earnings growth, and 40% from multiple expansion, with 10% being from dividends.

Below: 10-year future returns for the S&P 500 since 1983 based on the Schiller P/E - (which is based on average of earnings in the ten prior years)

The chart above shows a remarkable correlation of the average returns over the future 10 years for the S&P 500, based on the Schiller P/E ratio. Two vertical lines are appended to the chart: the first at a Schiller P/E ratio of 32x for Dec-23, and the second for at a Schiller P/E ratio of 38x at Dec-24.

In a nutshell: the S&P 500 is currently at a high Schiller P/E ratio, and if the historical trends for the last 40 years hold as above, near zero or negative nominal returns can be expected for the S&P 500 over the next decade, i.e. a breakeven or real terms loss to 2035.

Real Worth Stocks portfolio current P/E ratio and earnings growth

I am not able to calculate a Schiller P/E ratio for the Real Worth Stocks portfolio, but the weighted average P/E ratio of the portfolio is currently 12x.

The weighted average earnings growth for the Real Worth Stocks portfolio is 28% earnings growth per year - calculated from 10 year earning figures, or the maximum number of years available if less. Revenue growth weighted average is 22% per year.

Risk-reward ratio:

At current S&P 500 levels, the risk-reward ratio is not very good: if the market should revert to the long-term average of around Shiller P/E ratio of 15, this would be a 50% drawdown in the market. However, I consider this unlikely since the ratio has been above this level for the last 30 years or so: but even if it just declined to 20x, this would still be a 1/3 drop in the S&P 500. The trigger for such a decline could be a recession - in this case, if earnings dropped also, the decline could be more severe. Of course, earnings are likely to gradually increase over time, and predicting the timing and severity of market drawdowns is very difficult, if not impossible. What can be said with confidence is that the likelihood of poor future returns increases significantly as the market P/E multiples increase, and they are now at long term highs.

Conclusion:

The Real Worth Stocks portfolio is positioned to have percentage revenue and earnings growth more than double the long term percentage price return of the S&P 500, and is priced at ~1/3 the P/E ratio of the S&P 500, which should protect it in the face of any market shocks. I will continue to pick ten new stocks per year that offer good risk-reward for shareholders, with full portfolio reviews every 6 months on every stock in the portfolio, as to whether to buy or hold, and update on news affecting the stocks.

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Who are ASML?

AMSL manufacture extreme ultra-violet (EUV) lithography machines for making semiconductor chips - so they don’t make chips: but sell these machines to customers such as Intel, who do. ASML pioneered the EUV technology, that at one time was considered impossible, and continue to push the boundaries of what is possible in chipmaking. Essentially, their machines are the technical and market-leading solution for making the very small patterns on chips, that are allowing companies to keep following Moore’s Law, by packing billions of transistors onto chips.

Schematic of one of the ASML extreme ultra-violet machines for chip lithography: purple colour shows the beam path of the extreme ultra-violet light.

Pros of AMSL

1. The business quality looks excellent: they have a near-monopoly on the latest generation of extreme ultra-violet machines for making the latest generation of chips – these machines allow the creation of the <10 nm features which are used in the latest chips. This allows them to set high prices for their products, since their equipment is not easily substituted, and the chips are critical for many products from cars to routers to computers to tools. In addition, the cost of the ASML machines are a very small part of the cost of the chips, so ASML’s customers are likely to be relatively insensitive to price. Demand for the chips, and therefore the machines, is likely the main driver of profits rather than the price of their products.

2. The demand for chips looks robust into the future, and is likely to keeping growing, and they are well-placed to benefit from this. You could consider them like a ‘Picks and Shovels,’ type investment.

   It has been noted that the companies that made the most money in the California gold rush in the 1840s were not the gold miners, but those who sold the picks and shovels to the gold-crazed miners. Rather than a speculative search for gold, selling picks and shovels was the sure thing. In a similar vein: ASML does not make microchips, but provides the tools to the semiconductor industry to do so - tools that are superior to those of their competitors. However, the market is aware of this and so the stock is not cheap…

   

Cons of ASML

1. Current valuation:

Return in a stock can come from one of two sources: P/E multiple expansion, or growth in earnings of the business from revenue, and/or profitability increases. Let’s look at where the return came from over the last 10 years with ASML, and where it could come from in the future:

Oct-14: Stock price: $99, and P/E ratio: 31x. Operating margin 21%. Operating profit in 2014: $1.4B

Dec-24: Stock price: $688, and P/E ratio 38x. Operating margin 33%. Operating profit in 23/24: $8.8B

Total return in the ASML stock price is 22% CAGR. Operating profit compound annual growth rate is 20%. The difference between these can be accounted for via the increase in the P/E multiple.

If the operating margin had remained constant, instead of increasing from 21% to 33%, then earnings in 2023/24 would have been 8.8*21/33 = $5.6B. If this was the case, then the CAGR in operating earnings would have been 15%.

Therefore, we can divide the return into various factors:

15%: growth in revenue

5%: growth in profitability (improvement in operating margins from 21% to 33%)

2%: increase in the P/E multiple from 31x to 38x

Sum: 22% annualised return in the stock from 2014-2024.

For each factor, we can now consider what could happen in future for them:

1. Revenue growth: the 10 year CAGR for revenue over the last 10 years is 15%. During this period, there has been a boom in semiconductors due to AI – but actually, ASML makes most of it’s revenue from non-AI semiconductors – it’s primary customers are TMSC, Intel and Samsung. Therefore, the 15% growth rate can only continue if there continues to be the same continual demand increase for the company’s machines to make semiconductors. It is almost certain that semiconductor demand will continue to increase, but is it hard to say whether it will increase more or less than 15% CAGR. The overall semiconductor market is forecast to increase with a CAGR of 7% according to McKinsey. However, ASML is likely to have increased demand of more than 7%, but I would think less than 15%.

2. Growth in profitability: it is possible that profitability (profit margins) could grow further given the strong competitive position for the company. However, profitability is also geared to the percentage of their manufacturing capacity that is being used. Therefore, if there is a slowdown in revenue, this could negatively affect both their margins and profitability if their factories are underutilised - this is operating leverage in reverse.

3. Increase in P/E multiple for the company: it is already pretty high: at 38x. If there is a slowdown in growth, this could decrease.

4. Reliance on R&D and technical innovation. ASML is able to make high margins and charge high prices as it is at the cutting edge of technology. There is a risk that another company could become a serious challenger to ASML, eroding it’s competitive position. While this is unlikely in the next 5 years: it could happen longer term and this would negatively affect their share price.

There are high expectations for growth implicit in the current share price (after the fall). Therefore, the future direction of the share price is highly leveraged to the demand for their products. A small decrease to the demand forecast could lead to a big drop in the share price – which was seen recently - it peaked over $1080 in July 2024. At the time of publication the stock price of AMSL was $688.

Summary

In summary, personally I cannot recommend ASML for investment at the current price, because the downside risk is too high because of the high growth expectations baked into the current price. However, as a long term holding, it is likely to perform well given its strong position in the chip market, and it is one to watch. If there is a big economic slowdown, then it could be a great buy if the share price falls a lot further. For example, if the US goes into recession: chipmakers will greatly reduce their purchases of ASML’s machines, and so earnings will plummet, and the share price would also. After a price crash, 1-2 quarters into a recession might be a great time to buy the stock. Of course, demand for chips may stay strong for a while and the stock will may do well - but for me at the moment, there is too much downside risk to invest.

To learn what stocks I do consider good investments at this time, you can try our latest members-only stock pick for free below:

Disclosure: Real Worth Stocks does not have any position in ASML

Disclaimer: While every effort has been made to ensure the accuracy of information provided in this post, no guarantee is given as to its accuracy. This is not investment advice, and is informational only.

Investment Thesis:

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Buy 1: The biggest position in the portfolio (17%), a small US bank, is currently trading at an attractive valuation of 8x earnings with strong growth, and still presents a good buying opportunity despite being up 76% since originally picked.

Buy 2: An agricultural commodity stock which comprises 4% of the portfolio, is currently trading near an all-time low valuation relative to earnings of 2.5x P/E after subtracting it’s net current asset value, or 6x P/E ratio. The CEO has just been replaced, a new executive director appointed, and it has continued strong profitability. other factors which make this a good potential buy are discussed below.

Portfolio review: for the two ‘buys,’ and the other 10 stocks in the portfolio, I will explain:

• Still a buy at the current price, and why?

• Recent news and how it affect the investment thesis

• Performance since the stock was picked

The graph below shows position sizes in the portfolio:

The next chart shows full details of the portfolio: all stock names and the position sizes:

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I can summarise the lifecycle of many small biotech companies like this: they raise funds, pursue one or more drug candidates, and most of these fail during pre-clinical or clinical trials. At this point, they can choose to:

1. Keep pursuing R&D, burning through their cash until it is all depleted

2. Choose to liquidate and return cash to shareholders

3. Do a reverse merger: contributing their net operating loss carryforwards, to offset against the profits of another pharma or other company. They may also issue CVRs: contingent value rights: so that if for example, one of their drug candidates works out, and therefore the company suddenly becomes a lot more valuable, the pre-reverse merger shareholders who receive the CVRs will be able to benefit from this to some extent.

4. In combination with options 2 and 3, they will usually abandon their R&D efforts, either partially or totally, and lay off staff, exit leases, sell assets, etc. to conserve cash.

It’s in stage 1, the cash burning stage, where you can find biotechs trading below net cash - i.e. trapped value - because investors believe they will keep burning it until it is mostly/all gone. However, sometimes biotechs will announce that they are pursuing ‘strategic alternatives’ where they move from R&D to considering options 2-4 above, which can be a signal that value is about to be realised for shareholders, and that cash burn will be minimised. I will now give a current example of one such company, which has announced that it is considering strategic alternatives, which I think is attractively priced at the moment with downside protection due to net cash being just under 2x the market cap.

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1. Ben Graham Net-Nets (4 stocks)

2. Value (7 stocks)

3. Liquidations (1 stock)

I will be selecting a new stock pick soon, later in June. This update explains which four stocks are a buy and why, and which are holds, with a summary of key news for each stock in the portfolio.

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