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Jul 13, 2021
[5 min Read]
Alight is a benefits service provider that covers a spectrum of services in the space both in the U.S. and worldwide. It does 1) Health administration, 2) Healthcare Navigation, 3) Medicare Enrollment (For retiring people without pensions) 4) Wealth Administration, 5) Cloud Payroll, 6) Global Payroll, and 7) HCM Cloud Advisory and Deployment. In short it covers the full spectrum of the benefits service package, which no one has ever done before (even though it seems like a no brainer, which means it's competing in a fragmented space, offers better integration, has cross-selling opportunity, and can save their clients time while increasing gross and net profit margins). Don't believe me? Take a look at page 11 here: Welcome to a new way forward (q4cdn.com). They serve 70+% of fortune 100 companies, and over half the Fortune 500! The NAV of WPF which Alight merged with on July 6 was 10.70, but the company trades at 9.72, and it traded as low as 8.85 after the merger.
In an investor presentation update, Alight has already stated they are already modestly ahead of expectations on revenue and adjusted EBITDA because of strong booking growth. They have a strong product pipeline, and are also converting their revenue to BPAAS revenues which hold higher gross margins.
They have a strong acquisition streak, and their most recent one which was announced recently was the Aon Retiree Health Exchange for America, which complements their Choice Health Program. The deal terms were beneficial because Aon sold it as they are trying to get their M&A with Willis Towers approved and they have an anti trust trial they need to get through.
Product Pipeline in the 2nd Half of 2021
They had 96% revenue retention last year to this year, and an average of 15 year client tenure for their top 25 customers by revenue. They're also diversified by field, as companies from all segments need the services provided by Alight. 81% of their revenue is recurring (Subscription), while the rest is project based, and the CEO is trying to increase subscription revenues. They also expect 50% BPAAS revenue by 2023, which give higher margins, and the bundled health benefit BPAAS offers 50% more annual recurring revenue benefits.
They also have strong FCF and net leverage at a 3x ratio, which means they can pursue M&A safely to grow, and it's helpful that there are a large, fragmented and global pool of acquisition targets. With Bill Foley's experience, they'll be able to hone in on the best acquisition targets, since he will become the chairman.
These services can be integrated, and cross-sold, which Alight has already done with its current acquisitions as well.
They are looking to get 60%+ gross margin long term, and 40%+ by FYE 2023. Adjusted EBITDA Margin should be 24% in 2023.
Expected BPAAS Revenues (NOT TOTAL BOOKINGS) are 363M 2021E, 509M 202E, and 743M by 2023E. You can see their expectation for how much of that BPAAS revenue will comprise in the deck, but to sum it up it's 13, 17, 23%. In addition to margins, BPAAS will accelerate implementation and revenue recognition from the current 12-18 months to 6-9 months.
Total Revenue in 2021 is expected to be 2.76B in 2021, 2.945B in 2022, and 3.235B in 2023.
Free Cash Flow for 2021 is expected to be 465M, 493M in 2022, and 607M in 2023. Which means they can easily service the 300M bond in 2025, and the 1.976B Term Loan in 2026. I know they referenced potentially getting the terms changed so they pay a lower interest rate, but I'm not sure if they will.
Regardless after the merger, they received 360M to the balance sheet.
The best part of all this is that they are expected to have net income (excluding tax affected shareholder based compensation at a tax rate of 26% in 2021-2023E) of 9M at the end of 2021. This includes a one time 76M charge to extinguish their debt post merger, and one time restructuring costs regarding the merger which impact 2021 earnings for 44M. It also includes IT Optimus Investments which will run through 2021 and 2022 and can be found on page 20 of the slide deck. Finally intangible amortization is 201M, and Depreciation is 112M.
They expect Net income of 221M at the end of 2023.
There are a few AMAZING gems in the shit pile that is SPACS. This one is my favorite, and I expect a 200% return in 2-3 years, because of the stickiness of the model and the cross-sell opportunities that this company has as a full service provider (the only one) for employee benefits and retirement. I was thinking of doing another one in a week for another SPAC company that is merging that are good, but I need to acquire a strong enough stake in them first.
For Alight, I bought 2 7.5 Calls at an average of 2.43 for Feb 2022 which are nearly in the money. I had hoped to buy more, but with nearly 10K tied in options on both Cannae and CCS I felt constricted by risk management, and so that's what I put in. I also have 523 shares in the company. I had talked in the yacht club about this company for a few days now, and there was a point (before today, and yesterday) where you could have bought the 7.5 calls for Feb and had a breakeven below 9.90-9.95, which is ridiculous considering the NAV price was 10.70, and most SPACS are priced at 10.
This is the type of company with the moat, growth, and operating margins (That are expanding) that I want. The CEO is a rockstar if you look him up. There's a strong board, and mergers and acquisitions have consistently been good. Strong FCF, quarterly execution that is coming out the gate strong with a slight beat already, and a clear path to GAAP profitability on a net income basis.
Here you can find the CEO being interviewed on July 6th when the company officially went public:
Edit: Woops, let me show a SS as is proper with DD.