Tuesday, 17 February 2015

Tungsten (TUNG) ... it's a small world

Tuesday 17th February 2015

I've sold short in Tungsten (TUNG LN) at 208p/shr. 


Tungsten - share price
Source: Bloomberg
Tungsten provides an e-Invoicing network, allowing for automated invoice to payment services across a range of markets, legal and tax jurisdictions. It describes its Tungsten Network as connecting ... 
"... many of the World's largest companies and government agencies to their suppliers around the globe."
It also indicates that it: 
"... serves 55% of the Fortune 500 and 67% of the FTSE 100, enabling customers to send and receive compliant invoices."
Big numbers are highlighted in its 2014 annual report:
"The global market for receivables financing in the form of factoring was over €2.2tr in 2013, an increase of 4.6% from 2012. Of this, €1.2tr was in the EU, including €300bn in the UK. Factoring excludes other forms of receivables financing therefore the total addressable market for supply chain financing globally is in excess of €2.2tr."
Tungsten 2014 Annual Report - "The global opportunity"
Source: Tungsten Plc
Six months or so later, by the time of the group's 2015 interims (to 31 October 2014), Tungsten's investors must have been positively purring. Its total addressable market was now just 12% of a wider invoice market of $23.3 trillion.

Tungsten addressable market
Source: Tungsten Plc Interim statement to 31 October 2014 
Assuming this is all correct, the receivables financing market is big. And so any investor would no doubt reckon that as Tungsten is involved in it, that Tungsten shares are a Buy. Indeed, Tungsten Network has lofty ambitions which centre upon:
"We believe we can grow volumes to our $1,000 billion [in annual invoice flow] goal just by rolling out e-Invoicing to our current buyers globally and fully penetrating their supply base."
And so it would seem that Tungsten is targeting a 40% share of the global e-Invoicing market. One day this may well happen, but I do not see it as a serious prospect any time soon. 

Indeed, consensus sales projections were cut following the release of the interims on 14 January 2015, by c. 37% and c. 21% for 2016 and 2017 respectively. 

Tungsten - Consensus revenue projections
Source: Bloomberg
Downgrades to EBITDA forecasts were greater still; by c. 91% and c. 43% for 2016 and 2017 respectively. 
Tungsten - Consensus EBITDA projections
Source: Bloomberg
I reckon there could well be further downgrades to come. At the very least, this does not strike me as a company about to soak up 40% of the global e-Invoicing market any time soon. 

Tungsten arrived on the AIM market in October 2013, raising £160 million or £149 million net of costs. Pursuant to this it used £73 million in cash and an additional £28 million of equity (£101 million total) to purchase OB10 (now Tungsten Network), also in October 2013. 

On 10 June 2014, the group acquired FIBI Bank (renamed to Tungsten Bank plc) for £29.5 million. It subsequently spent a further £7.5 million as investment in operations. 

On 3 September 2014, the group raised a further £12 million at a price of 340p per share via a placing. 

In the 18 months to 31 October 2014, I estimate that Tungsten has reported: 
  • £24.2 million in operating cash outflows; 
  • £27.2 million in free cash outflows;
  • £106.6 million in investing cash outflows; 
and received 
  • £156 million in financing cash inflows.
Its net cash position declined from £62.6 million as at 30 April 2014, to £27.7 million as at 31 October 2014. Whilst it is investing heavily, it is also burning through considerable operating related cash. Consensus forecasts project that net cash will have declined to £4.3 million by 30 April 2015. On that basis, this would imply a further £23.4 million cash burn in H2 2015. 

As far as I can tell, the group has no formal debt facilities. A potential debt structure was alluded to on 14 July 2014; Tungsten explores debt funding opportunities. At that time Tungsten suggested that:
"Tungsten Network Finance has progressed discussions with a range of third parties (including Blackstone Tactical Opportunities) to explore additional sources of capital across geographies and jurisdiction that Tungsten operates in. This includes considering the options open to the Company to add debt to the structure as the Company creates a more mature and conventional balance sheet for Tungsten's business as Tungsten Network Finance grows."
A month later, further detail emerged on 15 August 2014; Update on debt financing. At this time, discussions with Blackstone Tactical Opportunities were seemingly no longer ongoing, but talks had opened up with the British Business Bank no less:
"Today, Tungsten is announcing that it made an application to the British Business Bank for a potential investment of up to £50 million in matched funding in support of a debt placement by Tungsten Corporation plc."
As highlighted further up, a quick £12 million was raised via equity a few weeks after this announcement. 

As far as I can tell, there has been no mention of either Blackstone Tactical Opportunities or the British Investment Bank in the six or so months since they were highlighted as talking to them. 

However, Tungsten announced on 22 December 2014, that it had struck a deal with Insight Investment Management Ltd; Tungsten agrees financing arrangement with Insight. By this stage, debt was seemingly no longer required:
"The funding to be provided under this multi-year agreement [with Insight] is expected to total several billion pounds. This financing, together with the existing capital within Tungsten Bank, will provide the Company with all the required funding at this stage for its invoice finance proposition, so the Company no longer needs to pursue alternative financing options, such as a bond issue." 
This is all very well and good, but the immediate outlook for Tungsten is that its financial projections have been downgraded, it's burning through a lot of cash, PwC has to sign off its books during the next four months or so, and therefore be certain that it has sufficient resources to meet its obligations. My reckoning is that a sizeable cash call is needed to persuade them to do the signing. 

So I shorted at 208p/shr.

And another thing ...

The group's interims to 31 October 2014 highlighted a £719,000 cash outflow as "loans to employees." I can find no mention to explain this further in the notes. If anyone can shed any light on what these loans were for, then I'm all ears.

And one other thing ...

That Tungsten is targeting c. 40% of the global e-Invoicing market is admirable, but seemingly there are quite a few others also targeting this market. Direct Insite is one such other (DIRI US).

By all accounts, Direct Insite, also has sizeable partners such as IBM, HP, Siemens, Royal Dutch Shell.

In fact whereas Tungsten suggests that it serves "55% of the Fortune 500 and 67% of the FTSE 100" ... 

... this compares to, Direct Insite, which claims to provide "electronic invoices to 75 percent of the Fortune 1000 and 100 percent of the Financial Times 100 corporations representing over $80 billion in invoice value each year."

It's a small world.  

Further, Direct Insite facilitates "$160 billion worth of transactions annually between more than 375,000 companies worldwide."

Direct Insite's $160 billion of transactions and 375,000 partners compares to Tungsten's £94 billion of e-Invoices in the 12 months to 31 December 2014, and 174,000 suppliers. 

The principal area where I found Direct Insite differed is in its valuation. Direct Insite is capitalised at just $9.8 million as compared to Tungsten's £217 million capitalisation. 

Direct Insite (DIRI US) - share price
Source: Bloomberg
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

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