Description

We think there is a timely opportunity in Alight (ALIT) to capitalize on a short-term dislocation within a currently glass half-full market.

Long story short, Alight is performing very well at the business level, has a comp set that is performing very well in the stock market, and Alight has a lengthy list of upcoming event catalysts. Unfortunately for Alight, but fortunately for new investors, they recently botched their first secondary offering – slamming the stock down nearly 20%. We think this is a short-term aberration and that the stock will quickly recover back to the $10 per share level (+18%) and grind higher from there.

Furthermore, we believe that the market is not fully aware that Bill Foley, orchestrator of the ALIT deal in the first place, ultimately pulled out of participating in the secondary and that his number two, Bill Massey, subsequently bought $840,000 of stock around current trading levels.

We like ALIT for its longer duration contracts (3-5 years), proven ability to provide bottom-line savings to customers, and upcoming inflection in earnings after investing heavily into its large Federal Thrift contract. ALIT is accelerating core revenue and profit growth next year while the market itself materially decelerates.

Alight was written up early this year by ka8104 and does an excellent job of explaining what the company does, how they make money, history, long-term thesis, etc. We recommend you refer to ka8104’s write-up for intricate company-specific details. We will quickly summarize here with the following:

Alight is one of the largest providers of outsourced human capital management or HCM solutions. Alight’s end-to-end cloud-based human capital management services and technology covers health, retirement, and employee wellbeing. The Company can offer hyper-personalized solutions to its 36 million employee and dependent base. Corporations are using Alight’s Worklife platform as a recruiting tool, an employee retention tool, and saving customers a lot of money along the way.  ALIT is a steady business, with 3-5 year contracts, 15 year average customer life, 97% revenue retention, and is gaining share with its “platform” approach to managing employees. Unless Alight’s service levels deteriorate, which they are not, it is rare for a customer to leave.

The Opportunity

Two weeks ago, ALIT launched a secondary offering that was quite a debacle in our opinion. Given that ALIT is still relatively unknown, the bankers seemed to think it would be a good idea to build an order book throughout the trading day post-announcement of the offering. The stock proceeded to sell off by 18% and it got so ugly that Bill Foley ultimately decided not to participate in the secondary. We thought Bill’s lack of participation was extremely telling given that he was initially listed as a selling holder. Furthermore, we learned a couple days later that Rick Massey bought $840,500 of ALIT stock.

We think it is highly probable that the stock recovers its pre-secondary levels (ie ~$10/sh) in the not-too-distant future as ALIT has a very heavy conference schedule, it seems there are incremental large notable deals in the pipeline, management recently reiterated their expected 10% growth next year, they “look forward” to providing specific 2023 guidance next quarter, and its inaugural analyst day is planned in early 2023. Furthermore, we expect the knowledge level of Alight and book-build execution to be much better in any future secondaries. Many of these points are detailed below.

Bill Foley did not sell stock in the offering: The tables below show the list of secondary selling shareholders. The first table is the original table that showed Bill Foley (“Bilcar”) was selling stock. The second table shows how he pulled out.

Table 1:

Table 2:

Accelerating 2023 top and bottom-line growth: We calculate that organic revenue growth should accelerate from around 3% this year to 7%-10% in 2023. We calculate that EBITDA growth should accelerate from 5% growth this year to 13% growth in 2023. Meanwhile, the S&P 500 revenue growth rate is expected to drastically decelerate from 13%/14% in 2022 to 3%/4% in 2023. Below, the green arrows denote ALIT’s accelerating growth, while the red arrows denote the overall market’s decelerating growth.

New, larger awards are expected: Cannae (CNNE) call comments on November 9, 2022 suggest material new business wins are probable. Rick Massey, CEO of CNNE on their ALIT investment: “So they're already about to hit their guidance. And they've got, what, 2 months left of the year. So they were doing really well, and you're going to see some really nice, surprisingly large new logos added over the next, call it, 60 days. They've signed them. They were not able to announce them just yet, but they're -- it just shows that they're just continuing to sop up all the Fortune 100 companies and make them customers. So we're very excited about Alight.”

Event path that supports our belief that the stock could quickly recover:

Recent Key Dates:

• 11/1/2022:     Benefitfocus gets acquired by Voya for 13.5x EBITDA, implying a $13.50 per share value for ALIT (+58% upside).

• 11/3/2022:     In a world of guide-downs, ALIT reports revenue and earnings above guidance and Street, reiterates CY22 guide, and on the call – where only two sell-side analysts asked questions – ALIT stated “We are tracking with our goals of double-digit revenue growth and margin expansion in 2023 and look forward to sharing our formal '23 guidance with our fourth quarter results in February.”

• 11/14/2022:  The bomb drops and ALIT announces (before market open) its inaugural secondary offering from private equity owners. Bill Foley himself was also planning to lighten-up in the secondary – albeit only a 0.3% reduction in total ownership. ALIT prices the secondary after building the book during the day, pricing at $7.75/sh and 21% below the prior day’s close. The stock closed 11/14 18% lower. It is unclear why the book build was not done the evening before, but it was nothing short of a botched effort in our opinion. It is also what is providing this opportunity.

Furthermore, we think that investors are yet to fully realize that Bill Foley was thoroughly disappointed with how the whole event played out and ultimately decided not to sell any stock in the offering when he saw where the deal would price. 

• 11/17/2022:  Director of ALIT and CEO of Cannae (CNNE), Bill Massey, filed a Form 4 showing that he purchased 100,000 shares of stock at $8.405/sh ($840,500 in value).

Upcoming Dates:

• Any day:          Major new business win announcements.

• 11/30/2022:  ALIT presents at the Credit Suisse Technology Conference.

• 12/14/2022:  ALIT presents at the 2nd Cannae Portfolio Companies Conference.

• February 2022: ALIT provides formal CY23 guidance with 4Q22 earnings.

• 2Q23:                ALIT hosts its first Investor Day, with specifics about the event being provided coincident with 4Q22 results.

Valuation. We think that as ALIT becomes better known, keeps delivering new business wins, and accelerates top and bottom-line growth, it should rerate towards Willis Towers Watson and Genpact (similar expected growth and financial profiles) – implying a $10.50/sh - $11.00/sh stock today at 11.0x-11.5x 1-year forward EBITDA.

Risks. The biggest risk we see is that there is a dramatic spike in unemployment that more than offsets new business wins.

Catalyst

• Any day:          Major new business win announcements.

• 11/30/2022:  ALIT presents at the Credit Suisse Technology Conference.

• 12/14/2022:  ALIT presents at the 2nd Cannae Portfolio Companies Conference.

• February 2022: ALIT provides formal CY23 guidance with 4Q22 earnings.

• 2Q23:                ALIT hosts its first Investor Day, with specifics about the event being provided coincident with 4Q22 results.