A new focus on e-invoicing

Tungsten Corporation 4 January 2016 Initiation

Tungsten Corporation

A new focus on e-invoicing

Initiation of coverage

e-invoicer & invoice financier

4 January 2016

Price

37.1p

Market cap

£47m

Net cash (£m) at end October 2015

39.7

Shares in issue

125.4m

Free float

69%

Code

TUNG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.2)

(37.6)

(86.9)

Rel (local)

(0.9)

(39.6)

(86.6)

52-week high/low

294.0p

31.0p

Business description

Tungsten Corporation operates a global e-invoicing network, as well as providing value-added services such as spend analytics to help buyers on its network save money, and invoice financing to suppliers to enable them to receive early payment on their invoices.

Next event

Capital markets day

9 February 2016

Analyst

Peter Thorne

+44 (0)20 3077 5765

Tungsten Corporation is a research client of Edison Investment Research Limited

Tungsten aims to transform its business in the next two years, to achieve EBITDA break-even on a run-rate basis by the end of FY17, from losses of £24.8m in FY15, by turning around its loss-making e-invoicing network business, selling its loss-making bank and reducing one-off costs in its other activities. In the key e-invoicing division it intends to reprice its services to the buyers on the network, increase the number of suppliers and re-engineer its processes to achieve the operational gearing potentially inherent in this activity. It believes that it now has sufficient funding to see the group through to break-even after raising £16.7m (net) in May 2015 and the proposed sale of its bank for c £30m. There is a great deal of uncertainty around forecasting, but if Tungsten can increase buyer prices and supplier numbers as intended and control costs, it could achieve EBITDA break-even by the end of FY17 on a run-rate basis.

Year end

Revenue*
(£m)

EBITDA*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

04/14

10.8

(10.2)

(18.6)

0.0

N/A

N/A

04/15

23.1

(24.8)

(26.3)

0.0

N/A

N/A

04/16e

27.7

(18.0)

(21.2)

0.0

N/A

N/A

04/17e

34.6

(9.8)

(6.1)

0.0

N/A

N/A

Note: *Revenue, EBITDA and EPS are indicative and based on management projections for FY16 and FY17.

e-invoicing turnaround

Management has guided that it expects to achieve EBITDA break-even on a run-rate basis by the end of FY17. On the basis that one-off costs diminish and invoice financing continues to be loss making, albeit on a reduced scale following the sale of the bank, a significant turnaround is required in e-invoicing for this to be achieved. If Tungsten could increase suppliers on the network, push through significant price increases to buyers and control costs through re-engineering its processes, we calculate that break-even would indeed be possible. It has already received some success with buyer repricing, with 14 buyers renewing contracts in H116 with an average price increase of 70%.

Proposed bank sale to provide cash cushion

Investors have been concerned that Tungsten will deplete its cash resources before it begins to generate positive cash flow. Our forecasts, based on management expectations, do not support this view and the proposed bank sale provides it with a cash cushion, which management has indicated it could access before the transaction closes, if necessary.

Valuation: High implied cost of equity

With £40m cash on the balance sheet, the market is valuing the operating activities at around £9m. Assuming a terminal growth rate of 3% for cash flows at the end of our forecast period in FY20, we estimate that the market is currently applying a cost of equity of 24% to Tungsten’s cash flows. Evidence of buyer repricing, greater supplier on-boarding and cost control could see a reduction in the risk premium

Investment summary

Company description: e-invoicing and invoice financing

Tungsten was founded in 2012 to use leads obtained from an e-invoicing business that Tungsten would acquire to break into the large, global and lucrative invoice financing market. A bank was acquired to facilitate funding. The e-invoicing business cost £101m, while the bank cost £30m, including £5m of goodwill. A further £5m of capital was injected into the bank on acquisition. Tungsten’s strategy has evolved to place more emphasis on transforming the profitability of its
e-invoicing business by increasing its scale, repricing and re-engineering its processes to enable it to achieve the operational gearing potentially inherent in the business. Given the slower than expected flow of invoice financing take-up in the short term, and alternative opportunities to fund the invoice financing, Tungsten has sold the bank with the transaction expected to be completed in six to 12 months for expected cash proceeds of c £30m. Management has suggested this will result in a net reduction to the cost base of £2m pa.

Financials: Improving profitability and cash flow possible

In FY15, Tungsten made an EBITDA loss of £24.8m, £13.5m after adjusting for one-off costs. In H116, the EBITDA loss was £9.5m and £7.1m after one-off costs. The company had a cash balance of c £40m at the end of H116. The likely completion of the sale of the bank in autumn 2016 for c £30m should result in end-FY17 cash of c £29m.

To achieve break-even on a run-rate basis by the end of 2017 as targeted by management, we estimate that e-invoicing will need to generate EBITDA of around £1.5m in FY17, assuming that invoice financing remains loss making. This turnaround could be achieved from volume gains, user repricing and process re-engineering to achieve the potential operational gearing inherent in the business.

The sale of Tungsten bank should mean that the Tungsten has enough cash to fund the business through to EBITDA break-even.

Valuation: High implied cost of equity

Tungsten is difficult to value as it is at the early stage of evolution, with many uncertainties about the development of its business and is yet to make a profit. We estimate that the market is currently applying a cost of equity of 24% to Tungsten’s cash flows, far higher than the 9% that Bloomberg estimates is used for the FTSE100.

Sensitivities: Highly sensitive to e-invoicing turnaround

To achieve the turnaround in e-invoicing profitability, Tungsten will need to significantly reprice the services it offers buyers, increase the number of suppliers on its network and re-engineer its processes to achieve the operational gearing that is potentially inherent in its volume-based business. Failure to achieve any of these measures would jeopardise its ambition to achieve EBITDA break-even on a run-rate basis by the end of FY17.

Company description

In October 2013, Tungsten listed on AIM and raised £160m. It used £101m of this to acquire an established e-invoicer, OB10, which has since been renamed Tungsten Network. An e-invoice is one that is sent from a supplier to its customer in electronic format for automated, straight-through processing. Invoice financing is an activity that allows a supplier to obtain early payment of the invoice by selling it to an invoice financier and so improve cash flow. To provide funds for its invoice financing efforts, Tungsten bought a bank for c £30m with a UK banking licence, now called Tungsten Bank. Tungsten has not achieved the growth that it anticipated in invoice financing and announced the sale of the bank in December 2015, subject to regulatory agreement. It is considering other options to obtain funding for discounted invoices to add to the arrangement it already has with Insight. Tungsten has also acquired rights via a five-year rolling licence agreement in September 2013 to a spend analytics service, which allows buyers on the network to analyse their spending and make cost savings by selecting the cheapest supplier.

Strategy

Tungsten has refreshed its strategy to focus on the profitable growth of its e-invoicing business. It seeks to expand the number of buyers and supplier users, re-engineer its processes to achieve the operational gearing that is potentially inherent in a scale business and reprice the services that it offers, especially to buyers.

Tungsten offers invoice financing in its product suite for those suppliers on its network who want early payment of their invoices. Following the sale of the bank this will be financed by Insight and other sources of finance are being pursued. By offering a seamless, transparent and good value service, it anticipates that it will win market share away from the incumbent operators.

Key investment considerations

We believe investors should consider the following:

its opportunity to become a large e-invoicer and extend into the lucrative invoice financing market;

scope to increase buyers and sellers;

scope to increase buyer pricing;

scope to enhance customer experience through Tungsten analytics;

the business should be intrinsically cash generative; and

management has targeted EBITDA break-even on a run rate by the end of FY17.

To achieve this, the company needs to achieve the following:

reprice its offering to buyers by an average of 50%;

increase the rate of on-boarding of suppliers; and

control costs while growing e-invoicing.

Management

Richard Hurwitz became CEO in July, having previously been in charge of Tungsten in the Americas and of global client development. Rick has 30 years' experience leading teams in financial services and information technology, as we describe on page 13. Since taking the helm, Rick has reconstituted the board to add germane expertise and be more independent. Two new independents have joined the board: David Benello (formerly at McKinsey) and Ian Wheeler (former senior marketing executive at Amadeus). He has also built a new executive team, adding executives who fill important skill gaps: CTO Brian Profitt, CMO Connie O'Brien, head of corporate development Guy Miller, and has hired a new head of Tungsten Network Finance, who will be announced in January. Other board members are Nick Parker, chairman (ex-PWC partner), Edi Truell, vice chairman (founder of Tungsten and ex-Duke Street Capital founder), Peter Kiernan (ex-Goldman Sachs) and Danny Truell (CIO at Wellcome Trust).

Key operating activities

Tungsten Network: e-invoicing activities – targeting profit

e-invoicing is a large and growing business. Billentis, an e-invoicing consultancy firm, estimates that globally, around 170bn invoices are sent by/to businesses and governments each year and of these around 28bn or 16%, are e-invoices and this figure is rising. Currently there is no official organisation collating the statistics in a standardised way.

Billentis estimates that e-invoices can save 60-80% of the cost of a paper invoice and quotes a Finnish state treasury estimate of a paper invoice costing €30-50 to process versus €1 for a fully automated one, and an Italian study by Politecnico di Milano quoting savings of €65 per invoice for a fully integrated process.

According to data collected by Billentis, most European e-invoicers just about break even in their
e-invoicing activities, as most of the cost savings made by using e-invoicing accrue to users rather than system providers such as Tungsten Network. Billentis also estimates that over 70% of the companies offering e-invoicing in Europe were part of companies that were profitable overall thanks to their other activities, which allow them to finance expansion of their e-invoicing activities. Billentis believes that e-invoicers seek market share and scale and hope to eventually make profits from providing add-on products such as spend analytics and invoice financing. Two leading e-invoicers, Ariba and Basware also offer these add-on services.

Tungsten’s management has an ambitious plan to achieve profitability through repricing and adding many more suppliers and buyers. Tungsten offers invoice financing which, following the sale of the bank, will be financed via the arrangement with Insight. Other funding sources are being pursued. In September 2013, Tungsten acquired the rights via a licence arrangement (terms not disclosed) to a spend analytics business. Tungsten Network has a trading history of over 10 years and around £50m has been invested in the development of the network. The business has never made a profit and, as we show in the table below, the EBITDA/revenue ratio has been negative by 10% to 18% over the last few years.

Exhibit 1: Tungsten Network*

£m

2011

2012

2013

2014

2015*

H116

Revenue

15.327

16.34

17.631

19.501

23.018

12.976

EBITDA

(2.372)

(2.432)

(2.564)

(2.747)

(2.296)

(2.292)

EBITDA/revenue (%)

(15)

(15)

(15)

(14)

(10)

(18)

Source: Tungsten. Note: *Underlying EBITDA after excluding one-off costs.

At end H116, Tungsten had 178 buyers on its network and 194,500 suppliers. The former earned 39% of revenues in that period and the latter 61%. Supplier revenue amounted to around £84 each in H116 and included annual licence and transactions fees. Only around 20% of suppliers pay fees to Tungsten, as Tungsten does not charge them for the first 52 invoices that are processed. Revenue from buyers was around £58,000 each and was mainly from licence/transaction fees but also included some set-up fees. The buyers on the network are mainly large, often well-known multinationals or large government agencies. On average, each buyer has over 1,000 suppliers who are frequently SMEs. Tungsten operates a closed network, which requires that buyers on its network invite their suppliers to join them on the network.

e-invoicing outlook

Exhibit 2 shows what needs to be achieved by e-invoicing according to management guidance for the group to break even in FY17.

Exhibit 2: Tungsten Network

Tungsten Network

2015

H116

2016e

2017e

2018e

2019e

2020e

Suppliers – end period

181,000

194,500

208,000

236,000

266,000

298,000

333,000

Increase in suppliers

13,000

13,500

27,000

28,000

30,000

32,000

35,000

Average suppliers

174,500

187,750

194,500

222,000

251,000

282,000

315,500

Revenue per supplier (£)

75

84

75

75

75

75

75

Increase in revenue per supplier

0%

0%

0%

0%

0%

Growth in average suppliers

13%

15%

11%

14%

13%

12%

12%

Buyers – end period

173

178

187

202

217

232

247

Increase in buyers

49

6

15

15

15

15

15

Average buyers

156

176

180

196

211

226

241

Increase in average buyers

15%

9%

8%

7%

7%

Revenue per buyer (£)

63,583

58,000

71,271

86,238

108,660

108,660

108,660

Increase in revenue per buyer

194,500

12%

21%

26%

0%

0%

Revenue

Suppliers

13.1

7.9

14.6

16.7

18.9

21.2

23.7

Buyers

9.9

5.1

12.8

16.9

22.9

24.5

26.1

Total

23.0

13.0

27.4

33.5

41.7

45.7

49.8

Administrative expenses

(28.2)

(15.7)

(31.7)

(32.0)

(32.0)

(32.0)

(32.0)

EBITDA

(5.1)

(2.7)

(4.3)

1.5

9.7

13.7

17.8

One-off costs

2.8

0.4

1.0

Underlying EBITDA

(2.3)

(2.3)

(3.2)

1.5

9.7

13.7

17.8

Underlying EBITDA margin

(10%)

(18%)

(13%)

5%

23%

30%

36%

Source: Edison Investment Research, Tungsten

Buyers and suppliers

In H116, Tungsten Network added another six buyers, having added a similar number in FY15 (excluding the 43 from the acquisition of DocuSphere) and two in FY14. This results in a total number of 178 buyers (two buyers merged in H116). Tungsten’s efforts to increase buyer numbers do seem to be bearing fruit; we have assumed nine more buyers in H216 and 15 per year in FY17 to FY20. Tungsten Network added 13,500 suppliers in H116, slightly ahead of the FY15 figure, but less than it planned. Tungsten has said that there are many suppliers in the pipeline waiting to join the network, but it is taking longer than expected to on-board them. Tungsten is taking steps to speed up the process, for instance by taking what was a mainly manual upload process carried out by Tungsten to a digital process performed over the internet and supported by the buyers who nominate the suppliers. We have assumed a similar level of suppliers is on-boarded in H216 and thereafter the number increases by a few thousand each year to reach 35,000 new suppliers added in FY20.

Raising prices for buyers

Tungsten intends to persuade its buyers that they should pay more for the service by convincing them of the following:

that on average each buyer processes just under 100,000 invoices per year and assuming that they save 50% of the cost savings calculated by the Finnish state treasury, the buyers would save £10 on each invoice processed making total savings of £1m per year, far in excess of the fee they are currently paying; and

Tungsten will offer its analytics service to buyers, which could enable them to make further cost savings. The analytics service analyses a buyer’s spending record and identifies occasions when it has paid one suppler more than another for the same good or service. As each buyer on average processes around £800m of invoices through Tungsten, if the analytics service enabled 10bp of saving it could enable each buyer to make further savings of around £0.8m.

As a buyer can take up to 18 months to connect its IT system to Tungsten Network’s and on-board its suppliers, there is likely to be considerable inertia and reluctance among the buyers to move to another e-invoicer, so Tungsten Network does have some pricing power. It now proposes to use that power. Tungsten Network’s contracts with buyers normally last three years, so that every year around one-third come up for renewal. In H116, Tungsten renegotiated renewals with 14 buyers at price increases averaging 70%. A further 35 buyers have contracts coming up for renewal in H216. In our forecasts we have assumed that Tungsten achieves a similar level of price renewal over the next two and a half years so that the average price increases are around 12% in FY16, 21% in FY17 and 26% in FY18. It should be noted that H116 revenue per buyer was slightly lower than it was in FY15 because the majority of new buyers were signed at the end of the period, so that little revenue was earned by them in the period and there were fewer, large one-off buyer set-up fees in H116 compared with the previous year. In our forecasts we have assumed that revenue per supplier remains around £75 in H216 and from FY17 to FY20. Tungsten expects supplier revenues to increase as a result of the Network effect – in particular, as new buyers are added Tungsten expects to earn additional revenue from connecting current suppliers to them.

Tungsten Network administrative expenses

In H116 administrative expenses were £15.7m, with just £0.4m of one-offs. Tungsten Network is proposing to keep administrative costs in H216 at a similar level to those in H116, making a total of £31.7m for the year. Thereafter it proposes to keep costs flat. Tungsten says that it has re-engineered its processes in Tungsten Network to reduce reliance on manual intervention and increase the amount of automation and tasks carried out by buyers and suppliers and this and similar measures will enable it to control costs. We have little visibility over the measures that have been taken and their likelihood of success so the cost control ambitions remain subject to considerable uncertainty.

e-invoicing forecasts

Our forecasts anticipate that network revenue will increase 19% in FY16 and 22% in FY17, and generate a 14% CAGR from FY17-20. These calculations are at best tentative and rely heavily on Tungsten Network’s sales efforts being successful. We have assumed that administrative costs are £32m pa from 2017-20. On the basis that Tungsten does control its costs as it intends, we calculate that Tungsten Network may achieve an EBITDA of £1.5m in FY17, EBITDA of £9.7m in FY18 and an EBITDA margin of 36% in FY20.

Invoice financing: A possible upside

While Tungsten seeks to earn profit from e-invoicing, it aims to enhance its returns by cross-selling the invoice financing product to the suppliers on its network. Invoice financing enables suppliers to obtain cash earlier than they would do otherwise and so improve their cash flow. A supplier sells an invoice that they have raised to a buyer of their product or service at less than face value to an invoice financier, frequently a subsidiary of a well-established bank. The invoice financier should then receive full payment on the invoice a little later and earn the difference between the amount received and the amount paid. Tungsten seeks to use the supplier relationships that it has acquired from its e-invoicing activities to build an invoice financing business. It proposes to make its method of giving credit, called Tungsten Early Payment (TEP), superior to the incumbent operators. The delivery mechanism will be fully integrated with the e-invoicing activities and once set up, will require an authorised individual to click a box on a list of invoices available for early payment.

TEP intends to offer a low cost and transparent pricing structure, in contrast to many existing operators who currently have a complicated fee structure and charge relatively higher prices.

Initially funding was to be provided by Tungsten Bank. However, the lower than expected take-up of its invoice financing offer, together with the availability of finance from others has led Tungsten to conclude that shareholders’ interests would be better served by selling the bank. An agreement to sell it for £30m, NAV (ex-intangibles) plus c £4m-5m premium depending on when the transaction closes, was announced with the H116 results and the transaction is expected to be completed within six to 12 months.

In December 2014, Tungsten announced that it had entered into an agreement with Insight Investment Management, under which Insight agreed to acquire invoices from Tungsten. Insight is a global investment manager owned by BNY Mellon, with over £300bn of assets under management. In addition to Insight there are many other potential acquirers of discounted invoices, including alternative finance providers and some of the recently listed investment companies investing in SME loans. Details of Insight’s revenue sharing arrangements with Tungsten are not in the public domain. We expect that Insight’s funds will bear any credit loss from the lending and Tungsten will take a share of the interest received from the lending, which it will record in its accounts as a fee. The lending will not be recorded on Tungsten’s balance sheet (nor that of Tungsten Bank) so there will be no requirement for capital backing for the lending to comply with Bank of England PRA capital requirements. The anticipated lending rates depend on the size of the supplier, with SMEs estimated to pay up to 12% per year and large companies around 3% to 5% per year.

Tungsten launched its invoice financing service in November 2014. As evident in the H116 results, the take-up has been slower than hoped for. For a supplier to discount an invoice it is necessary that Invoice Status Service (ISS) is enabled for buyers. It is also necessary for suppliers to register for the service. At the end of H116, 294 suppliers had registered (with 108 using the service), up from 38 at end FY15, but this is a small fraction of the number of suppliers on the network. The value financed was £43m, from £32m at end FY15. Most of these invoices were of short duration, 40 days in H116, such that the average amount of outstanding finance in H116 was £12.8m. While this is a meaningful increase on the £6.5m in H215, it is a small fraction of the amount that its suppliers likely financed during the period, which we estimate was probably around £1bn.2 The average gross yield on the financing was 6.17%.

Tungsten Network processes around £112bn of e-invoices per year of which around 8.5% are likely to have been discounted according to industry statistics, a total of £9.5bn of discounted invoices. Assuming that each invoice is financed for 44 days, this would produce around £1bn of average outstanding.

The potential to sell invoice financing to suppliers on its network remains, and indeed other e-invoicers are also offering suppliers invoice financing such as Basware and Ariba, a large e-invoicer owned by SAP. Tungsten faces competition for invoice financing not just from the traditional suppliers but also other e-invoicing organisations.

Tungsten has identified two main causes for the slow take-up of this product to date:

the procedure to enable suppliers to qualify for invoice financing has been too cumbersome and time consuming and has discouraged many from applying. Tungsten is seeking to remedy this by simplifying and speeding up the approval process; and

in many cases, the person deciding whether to obtain finance from discounting invoices is unfamiliar with Tungsten and is based in a different department, treasury rather than accounts receivable. Tungsten has invested in more sales and marketing to overcome these problems.

Additionally Tungsten needs to work hard to establish its brand and reputation as a provider of finance.

In H116 revenue from TEP was £84,000 and consisted of the revenue on invoice receivables financed by Tungsten Bank. No revenue was recognised on invoice receivables financed by Insight as Tungsten could not provide invoices that met with Insight’s requirements

Invoice financing forecasts

Our tentative forecasts for Tungsten Network Finance are shown in Exhibit 3 below. For H216 and H117 we have assumed a similar level of revenue and profits as H116, but for H217 and onwards we have assumed the sale of the bank has completed and all revenues will be earned by passing the invoices to Insight or another funding provider. We have assumed that Tungsten Network earns fees of c 1% of the value of these invoices. This fee is towards the lower end of fees earned by other providers. GLI Finance, a company that owns 19 alternative finance platforms arranging loans for SMEs, earns fees of c 1-4% for loans arranged. Given Tungsten’s desire to build this business, we have assumed, conservatively, that it charges fees at the bottom of this range. We have anticipated that invoices discounted in H216 are 15% higher than in H1 and that from FY17-20 they grow at a rate of 20% pa. In H116, an impairment charge of £6.3m was incurred as a result of the propose sale of the bank, which should be partially recovered in FY17 as a gain of £2.2m should be earned on completion of the proposed disposal. We have assumed that the cost base falls by £1m in FY17 as a result of the sale of the bank and by £2m per year thereafter, as indicated by management. These forecasts anticipate that EBITDA losses fall from £5.4m in FY17 to £2.5 in 2020. We have taken a cautious view of Tungsten Network Finance forecasts given the lack of visibility on its likely volume growth or its pricing structure. We expect that Tungsten will persist with the activity given the potential size of the market and the likely reduction in losses.

Exhibit 3: Tungsten Network Finance

£m

2015

H116

2016e

2017e

2018e

2019e

2020e

Invoices discounted £m

65

140

168

202

242

290

Growth pa

20%

20%

20%

20%

Average TEP lending

3.3

12.8

14.8

25.0

30.0

40.0

50.0

Growth pa

69%

20%

33%

25%

Revenue

Fees

0.1

0.1

0.3

1.0

2.0

2.4

2.9

Total revenue

0.1

0.1

0.3

1.0

2.0

2.4

2.9

Administrative expenses

(12.8)

(3.7)

(7.4)

(6.4)

(5.4)

(5.4)

(5.4)

EBITDA

(12.7)

(3.6)

(7.1)

(5.4)

(3.4)

(3.0)

(2.5)

One-off costs

6.3

1.3

2.8

0.0

Underlying EBITDA

(6.4)

(2.4)

(4.4)

(5.4)

(3.4)

(3.0)

(2.5)

Underlying EBITDA margin

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Source: Edison Investment Research, Tungsten

Financials

The following table is a summation of the forecasts for Tungsten Network and Tungsten Network Finance discussed previously, together with the corporate centre. These forecasts have been based on management guidance of EBITDA break-even on a run-rate basis by the end of FY17 for the group and indicate what needs to be done to achieve this goal. Our revenue and EBITDA forecasts for FY16 are in line with management’s guidance of revenue of at least £27.5m and an EBITDA loss of no more than £19m.

Exhibit 4: Tungsten Corporation

£m

2015

2016e

2017e

2018e

2019e

2020e

Revenue

Tungsten Network

23.0

27.4

33.5

41.7

45.7

49.8

Tungsten Network Finance

0.1

0.3

1.0

2.0

2.4

2.9

Total

23.1

27.7

34.6

43.7

48.1

52.7

Administrative expenses

Tungsten Network

(28.2)

(31.7)

(32.0)

(32.0)

(32.0)

(32.0)

Tungsten Network Finance

(12.8)

(7.4)

(6.4)

(5.4)

(5.4)

(5.4)

Corporate centre

(7.0)

(6.6)

(6.0)

(5.0)

(5.0)

(5.0)

Total

(48.0)

(45.7)

(44.4)

(42.4)

(42.4)

(42.4)

EBITDA

Tungsten Network

(5.1)

(4.3)

1.5

9.7

13.7

17.8

Tungsten Network Finance

(12.7)

(7.1)

(5.4)

(3.4)

(3.0)

(2.5)

Corporate centre

(7.0)

(6.6)

(6.0)

(5.0)

(5.0)

(5.0)

Total

(24.8)

(18.0)

(9.8)

1.3

5.7

10.3

Source: Edison Investment Research

At the end of H116, Tungsten had £39.7m of cash and equivalents, of which £23.9m was held in Tungsten Bank, leaving £15.9m available for the rest of the group. By the end of FY16 we anticipate that the cash will have fallen to £33.2m and, assuming a similar amount is held within the bank, this would leave £9.3m for the rest of the group. With cash outflows continuing in FY17, we anticipate that the cash and equivalents balance would fall to £29.0m by end FY17, but with the sale of the bank completed by then and the cash at the bank becoming cash available to Tungsten, all of this balance will be available for the group. In FY18, we anticipate that the group will generate positive cash flow from its operations, so cash and equivalents could rise to approaching £30m at the end of FY18, and to around £45m at the end of FY20.

Valuation

The valuation of Tungsten is highly subjective given the company’s early stage of development and the many uncertainties associated with its expansion in e-invoicing and invoice financing. Our main approach is to use reverse discounted cash flow analysis to estimate what the current market capitalisation of the company implies for Tungsten’s cost of equity, assuming management achieves its break-even forecast for 2017. We also attempt to place the valuation of Tungsten in the context of other companies with e-invoicing activities.

DCF analysis

The market capitalisation of Tungsten’s ordinary shares is currently around £47m and with c £40m of cash and equivalents on its balance sheet that implies that the market is currently valuing the operating entities at £9m. The free cash flows that we have used in our DCF valuation are shown in Exhibit 5 below and are based on management’s expectation that it will achieve EBITDA break-even on a run-rate basis at the end of FY17 and the specific assumptions we have articulated earlier in the report.

Exhibit 5: Tungsten Free cash flows H216-2020e

£m

H216e

(6.6)

2017e

(8.2)

2018e

0.8

2019e

5.2

2020e

9.8

H216e

2017e

2018e

2019e

2020e

£m

(6.6)

(8.2)

0.8

5.2

9.8

Source: Edison Investment Research

On the basis that the terminal growth rate of Tungsten’s cash flows after 2020 is 3% per year, we estimate that the market is currently applying a 24% cost of equity to Tungsten’s cash flows.3 This rate is considerable higher than Bloomberg’s estimate of the cost of equity for the FTSE100 and reflects the uncertain developmental stage of Tungsten’s activities.

From FY21 we have reduced the cash flows by 20% to allow for a normal tax charge.

Peer analysis of operating activities

Most e-invoicing companies are either privately owned or part of larger organisations, notably the global leader Ariba, owned by the giant German software company SAP, which makes peer comparisons of limited value. The most frequently cited comparable to Tungsten is Basware, but just under a third of its revenue is derived from e-invoicing operations, the remainder is from providing software solutions.

However, there has been some takeover activity in the e-invoicing industry, which offers some valuation comparison. Exhibit 6 summarises the largest e-invoicing M&A transaction, SAP’s purchase of US company Ariba, and three of Basware’s recent larger transactions. The weighted average EV/Sales of Basware’s deals is 3.7x. Tungsten paid £101m (gross) for Tungsten Network in 2013, a multiple of 5x sales. This multiple reflected management’s hope that it could monetise the e-invoicing relationships, although this has proved challenging.

Exhibit 6: Details on SAP’s Ariba acquisition and recent Basware acquisitions

Acquired company

Purchaser

Date

Enterprise value (EV)

EV/Sales

Ariba

SAP

May 2012

US$4,300m

7.6

Procserve

Basware

April 2015

€25.9m

2.7

Centripost

Basware

February 2013

€24.0m

2.8

First Businesspost

Basware

January 2012

€15.7m

6.5

Weighted average of Basware deals

3.7

Source: Bloomberg, Basware

Using the EV/sales multiples in Exhibit 6 above and taking FY15 achieved sales, it is possible to compute a sum-of-the-parts (SOTP) valuation for Tungsten of 91p, as shown in Exhibit 7 below.

Exhibit 7: SOTP valuation of Tungsten Corporation

£m

Cash at end H116

Face value

40

Operating activities

Revenue (23.1) x 3.7

85

Total

125

Number of shares (m)

125.4

Value per share (p)

100

Source: Edison Investment Research

Sensitivities

The continued growth of e-invoicing: continued growth in e-invoicing can be expected to occur for the following reasons:

economic growth increasing the overall number of transactions;

increased penetration by e-invoicing of the total number of invoices as a result of cost and time savings compared with other forms of invoicing; and

the promotion by many governments around the world of e-invoicing to save processing costs, time and reduce tax fraud.

Expansion of Tungsten e-invoicing network: the Tungsten Network is concentrated in the developed world in Europe, the UK and US. Tungsten is looking to expand its network into the rest of the world, especially giant emerging markets like India and China.

Acceptance of Tungsten Easy Payment: Tungsten’s invoice financing offer is in the early stages of its development and faces headwinds of unfamiliarity and cumbersome on-boarding requirements. Tungsten is addressing these issues, and if they can be resolved, its success in invoice financing could be increased.

Competition: Tungsten faces strong competition from other e-invoicers as well as the factoring companies and invoice discounters. If Tungsten becomes successful they are likely to adapt their offerings to complete with Tungsten and many hinder the expansion of its business.

Financing: Tungsten will need to convince its potential customers that it has similar access to financing as the incumbent operators. It currently has a financing agreement with Insight, which should provide it with the quantity and reliability of the finance that it requires, but should that arrangement be curtailed, Tungsten would be vulnerable.

Cost control: Tungsten has re-engineered its processes in order to obtain the economies of scale that it believes are available in a scale activity like e-invoicing. Failure to successful implement the re-engineering is likely to prevent the achievement of its profitability goals.


Exhibit 8: Financial summary

30 April (IFRS)

£m

2014*

2015

2016e

2017e

PROFIT & LOSS

Supplier revenue

13.1

14.6

16.7

Buyer revenue

9.9

12.8

16.9

Tungsten Network

10.8

23.0

27.4

33.5

Tungsten Network Finance

0.1

0.3

1.0

Corporate centre

0.0

0.0

0.0

Revenue

 

10.8

23.1

27.7

34.6

Tungsten Network (e-invoicing)

(12.1)

(28.2)

(31.7)

(32.0)

Tungsten Network Finance

(1.9)

(12.8)

(7.4)

(6.4)

Corporate centre

(7.0)

(7.0)

(6.6)

(6.0)

Administrative expenses

 

(20.9)

(48.0)

(45.7)

(44.4)

Tungsten Network

(1.3)

(5.1)

(4.3)

1.5

Tungsten Network Finance

(1.9)

(12.7)

(7.1)

(5.4)

Corporate centre

(7.0)

(7.0)

(6.6)

(6.0)

EBITDA

 

(10.2)

(24.8)

(18.0)

(9.8)

Depreciation & amortisation

(0.8)

(2.3)

(8.0)

0.0

Share based payment

0.0

0.0

(0.3)

0.0

Operating Profit

(10.9)

(27.1)

(26.3)

(9.8)

Exceptional gain

0.0

0.0

0.0

2.2

Net finance expense

(0.2)

(0.2)

(0.0)

0.0

Profit Before Tax (IFRS 3)

 

(11.1)

(27.3)

(26.3)

(7.7)

Tax

0.1

0.3

0.2

0.0

Profit After Tax (IFRS 3)

(11.0)

(27.0)

(26.1)

(7.7)

Average Number of Shares Outstanding (m)

59.2

102.6

123.6

125.4

EPS - (IFRS) (p)

 

(18.6)

(26.3)

(21.2)

(6.1)

Dividend per share (p)

0.0

0.0

0.0

0.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

Network statistics

Suppliers-end period

168,000

181,000

208,000

236,000

Increase

13,000

27,000

28,000

Average suppliers

154,000

174,500

194,500

222,000

Revenue per supplier £

75

75

75

Buyers-end period

124

173

187

202

Increase

49

14

15

Average buyers

123

156

180

196

Revenue per buyer £

63,583

71,271

86,238

BALANCE SHEET

Fixed Assets

 

115.9

131.0

120.6

121.1

Intangible Assets

114.2

128.1

117.6

117.6

Other

1.7

2.8

3.0

3.5

Current Assets

 

72.7

47.4

46.3

37.0

Trade and other receivables

6.0

8.4

8.0

8.0

Invoice receivable

0.0

6.4

0.0

0.0

Cash

62.6

32.6

9.3

29.0

Other

4.0

0.0

0.0

0.0

Assets held for sale

0.0

0.0

28.9

0.0

Current Liabilities

 

14.6

17.3

15.5

14.4

Trade and other payables

6.8

8.6

6.6

6.6

Borrowing

0.0

0.0

0.0

0.0

Deferred income

7.8

8.6

7.8

7.8

Liabilities held for sale

0.0

0.0

1.1

0.0

Long Term Liabilities

 

2.9

4.0

3.5

3.5

Long term borrowings

0

0

0

0

Other long term liabilities

2.9

4.0

3.5

3.5

Net Assets

 

171.1

157.1

147.8

140.1

CASH FLOW

Operating Cash Flow

 

(8.1)

(31.6)

(15.5)

(7.7)

Capex

(2.3)

(1.1)

(1.0)

(0.5)

Acquisitions/disposals

(74.7)

(9.6)

0.0

4.0

Financing

144.4

11.8

16.7

0.0

Other

0.0

0.0

0.0

0.0

Net Cash Flow

59.2

(30.5)

0.3

(4.2)

Opening cash

3.4

62.6

32.6

33.2

Exchange adjustment

0.0

0.4

0.3

0.0

Closing cash

 

62.6

32.6

33.2

29.0

Borrowing

 

0.0

0.0

0.0

0.0

Closing cash/(Net debt)

 

62.6

32.6

33.2

29.0

Cash in Tungsten Bank

19.5

23.9

0.0

Cash at Tungsten

 

 

13.1

9.3

29.0

Source: Tungsten, Edison Investment Research. Note:*Tungsten Network included for six months only from date of acquisition.

Contact details

Revenue by geography 2015

Tungsten Corporation
Pountney Hill House
London
EC4R 0BL
+ 44(0) 870 1657420
www.tungsten-network.com

Management team

Non-executive Chairman: Nick Parker

CEO: Richard Hurwitz

Nick is a former partner at PwC where he led the Project Finance and Privatisation group. He was a part time head of Performance & Innovation at the Scottish Executive from 2004-07.

Rick joined Tungsten in March 2014 and has 30 years’ experience in talent development, general management and capital-raising with financial services and technology companies. Among the roles he has undertaken are the implementation of strategic transformation at Pictometry International (aerial photography), a partner in a private investment firm (Aegis Investment Partners), a managing partner for a firm placing structured finance deals and the European CEO of real-time financial information company Bridge Information Systems.

CFO: David Williams

David has 16 years’ financial experience and is a fellow of the ICAEW, having trained at Arthur Andersen. He has spent five years in the corporate finance division of Ernst & Young and five years at a consulting firm. He joined Tungsten shortly after its inception and was appointed CFO in March 2015.

Principal shareholders

(%)

Odey Asset Management

19.60

Edmund Truell

16.97

Morgan Stanley and Co. International

8.00

Sanlam Four Investments

5.60

Indus Capital Partners

5.57

FIL Investment International

3.63

Hargreaves Lansdown Asset Management

3.59

Companies named in this report

SAP (SAP), Basware (BAS1V)

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Tungsten Corporation and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Share this with friends and colleagues