Resilience and promising partnerships

Tungsten 20 July 2020 Update
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Tungsten Corporation

Resilience and promising partnerships

FY20 update

Financial services

20 July 2020

Price

40p

Market cap

£50m

Net cash (£m) end April 2020

3.2

Shares in issue

126.1m

Free float

100%

Code

TUNG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

14.5

38.6

(19.2)

Rel (local)

14.2

27.3

(4.4)

52-week high/low

55.00p

20.00p

Business description

Tungsten Corporation operates a transaction platform with services including e-invoicing, e-billing and purchase order handling. Adjacent services such as spending analysis, invoice data capture and, through a partnership, supply chain finance are also offered, providing additional benefits to customers.

Next events

Final results FY20

7 September

Analyst

Andrew Mitchell

+44 (0)20 3681 2500

Tungsten Corporation is a research client of Edison Investment Research Limited

Tungsten Corporation’s full-year trading update indicated revenues and EBITDA for FY20 were in line with expectations while net cash has increased since H120. COVID-19 has affected transaction volumes but resilience is provided by recurring revenue. Partnerships to broaden the reach of the network, create new channels to market and provide complementary services should help drive growth. New total accounts receivable (AR) and accounts payable (AP) products are also set to augment revenue and increase the value of the network to customers.

Year end

Revenue (£m)

EBITDA
(£m)

EPS
(p)

EV/revenue (x)

EV/EBITDA (x)

Net cash
(£m)

04/17

31.3

(11.8)

(9.9)

1.5

N/A

17.5

04/18

33.7

(4.6)

(9.5)

1.4

N/A

6.4

04/19

36.0

0.6

(2.7)

1.3

77.8

2.8

04/20*

36.8

2.7

(3.1)

1.3

17.5

3.2

Note: EBITDA is adjusted, before share-based payments and other items; EPS reported. Tungsten does not currently pay a dividend. *FY20 revenue and net cash as reported in trading update, EBITDA and EPS consensus numbers.

FY20 trading update: On track

Tungsten’s FY20 trading update signalled the group is broadly on track in terms of numbers and strategy implementation. Revenue of £36.8m was up 2% on the prior year or +3% ex-Tungsten Network Finance (TNF) to £36.3m. Adjusted EBITDA was in line with guidance (implying c £2.7m or £3.7m ex-TNF). Net cash at £3.2m was up from £1m at end H120, largely for seasonal reasons, but still ahead of expectation. New sales billings were flat y-o-y at £4m but accelerated between first and second halves (£1.7m to £2.3m) reflecting traction of new products. As planned, the TNF loan portfolio was wound down in June with supply chain financing continued through a partnership with Orbian. A partnership has been established with a major US bank, which could lead to the addition of up to 28 accounts payable customers, and technical integration with Coupa Software’s Coupalink platform has been completed opening the potential for Tungsten to act as an e-invoicing partner to this business spend management platform.

Outlook: E-invoicing opportunity remains in sight

Over 90% of Tungsten’s revenues are recurring and repeatable, providing resilience. There is still some uncertainty over prospective transaction-related revenue, which dropped post lockdown but is now recovering. Tungsten indicates that if volumes return to pre-COVID levels by the start of H121 then consensus FY21 expectations could be met (revenue c £39m, adj EBITA c £5m). We look to resume publication of estimates later in the year as the situation becomes clearer. On a longer view the pandemic has underlined the benefits of e-invoicing and Tungsten remains committed to delivering the growth opportunity this provides.

Valuation

Tungsten trades on an enterprise to sales multiple of 1.3x compared with peers Coupa, Basware and Esker on 30.4x, 5.5x and 6.9x respectively. There is therefore significant scope for the valuation gap to narrow as Tungsten provides further evidence of delivery of its strategy.

Strategy, recurring revenue and cash flow

Here we provide a brief reminder of the key elements of Tungsten’s strategy, further detail on the nature of recurring and repeatable revenue and an illustration of the recent evolution of cash flow.

Strategy

The group set out a revised strategy in July 2019. This reflected the identification that the group’s key relative strength is in processing and delivering invoices between companies and that it should open its network by connecting with other platforms to facilitate the ability to process 100% of a buyer’s or supplier’s invoices.

The three main elements of the strategy are as follows:

1.

Driving the network effect. This involves the new total AR and total AP products enabling customers to route all incoming or outgoing invoices through the Tungsten network, thereby increasing the value of the service to end-customers and strategic partners. Sales of both new products were achieved in FY20.

2.

Interconnecting with other platforms. As noted above, establishing connections with other platforms should increase the value of the Tungsten Network to customers and contribute to increased transaction volumes (previously something of a lagging indicator) and revenues. Tungsten has completed an interconnection project with procure-to-pay (P2P) provider, Coupa, which could provide the basis for further cooperation in future. Tungsten is also talking to several other P2P vendors with a view to achieving similar connections.

3.

Ancillary services. With the withdrawal from TNF completed in June, the partnership to provide trade finance with partner, Orbian, is underway. An agreement has been reached with a major UK retailer that will provide access to its supplier base to offer this service.

Recurring and repeatable revenue

As noted earlier, a very high proportion of revenue is recurring or repeatable (93% for FY20). Recurring revenue is buyer and supplier annual fees plus workflow (software) maintenance fees; and repeatable revenue is buyer and supplier transaction and archiving fees. Other Tungsten Network revenue includes initial and maintenance fees. In H120 total recurring and repeatable revenues accounted for 54% and 38% of group revenues respectively, so more than 50% of revenue is not affected by near-term transaction volume variations.

Cash flow history

Historically, investment in new technology and trading losses have absorbed cash at Tungsten but as shown in Exhibit 1, cash flows have been on an improving trend, albeit one that is enhanced in the second half by normal seasonal working capital fluctuations. Looking ahead, there is the potential for improved profitability aided by cost elimination through the closure of TNF and operational gearing in the main Tungsten Network business; this in turn should benefit cash flows given the investment in IT that has already taken place.

Exhibit 1: Half-yearly cash flow progression

Source: Tungsten Corporation, Edison Investment Research


Exhibit 2: Financial summary

30 April (IFRS)

£m

2015

2016

2017

2018

2019

PROFIT & LOSS

Tungsten Network

22.4

25.9

31.1

33.3

35.4

Tungsten Network Finance

0.0

0.0

0.2

0.3

0.7

Group revenue

 

22.5

25.9

31.3

33.7

36.0

Expenses

Tungsten Network

(28.2)

(31.7)

(35.4)

(31.0)

(27.3)

Tungsten Network Finance

(10.6)

(3.8)

(1.8)

(1.6)

(2.6)

Corporate centre

(6.8)

(6.6)

(5.9)

(5.7)

(5.6)

Group expenses

 

(47.8)

(42.1)

(43.1)

(38.3)

(35.4)

EBITDA

Tungsten Network

(5.7)

(5.8)

(4.3)

2.3

8.1

Tungsten Network Finance

(10.6)

(3.8)

(1.7)

(1.3)

(1.9)

Corporate centre

(6.8)

(6.6)

(5.9)

(5.7)

(5.6)

Group EBITDA

 

(25.2)

(16.2)

(11.8)

(4.6)

0.6

Depreciation & amortisation

(2.3)

(2.5)

(2.8)

(2.8)

(4.1)

Share based payment

(0.2)

(0.5)

(0.4)

(0.6)

(0.2)

Other income

0.0

0.3

0.0

0.0

0.0

One-off costs

(2.4)

(3.2)

FX gain/(loss)

0.0

0.0

2.3

(1.5)

1.7

Operating Profit

 

(27.7)

(18.9)

(12.6)

(12.1)

(5.2)

Net finance cost

(0.2)

0.4

(0.0)

(0.6)

(0.1)

Profit Before Tax

 

(27.9)

(18.5)

(12.7)

(12.7)

(5.3)

Tax

0.3

0.7

0.4

0.8

1.9

Profit from continuing operations

(27.6)

(17.8)

(12.3)

(11.9)

(3.4)

Discontinued operations/TNF from FY18

0.0

(9.4)

(0.2)

0.0

0.0

Profit After Tax

(27.6)

(27.2)

(12.5)

(11.9)

(3.4)

Average Number of Shares Outstanding (m)

102.6

123.7

126.1

126.1

126.1

EPS - continuing operations (p)

 

(26.9)

(14.4)

(9.7)

(9.5)

(2.7)

EPS (p)

(26.9)

(22.0)

(9.9)

(9.5)

(2.7)

Dividend per share (p)

(1.0)

0.0

0.0

0.0

0.0

EBITDA Margin (%)

(111.9)

(62.4)

(37.7)

(13.8)

1.7

BALANCE SHEET

Non Current Assets

 

131.0

119.2

120.8

126.5

123.5

Intangible Assets

128.1

116.8

118.5

123.4

120.8

Other

2.8

2.5

2.3

3.1

2.7

Current Assets

 

46.8

46.7

30.6

16.7

11.3

Trade and other receivables

14.2

8.7

13.1

10.3

7.5

Cash

32.6

9.3

17.5

6.4

3.8

Other

0.0

0.0

0.0

0.0

0.0

Assets held for sale

0.0

28.7

0.0

0.0

0.0

Current Liabilities

 

17.3

16.8

17.4

18.2

15.1

Trade and other payables

8.6

7.5

9.5

8.9

7.1

Borrowing

0.0

0.0

0.0

0.0

1.0

Deferred income

8.6

8.3

7.9

8.6

0.0

Liabilities held for sale

0.0

1.0

0.0

0.0

0.0

Provisions

0.8

0.2

Long Term Liabilities

 

4.0

3.0

2.6

3.6

3.4

Long term borrowings

0

0

0

0

0

Other long term liabilities

4.0

3.0

2.6

3.6

3.4

Net Assets

 

156.5

146.1

131.3

121.5

116.3

CASH FLOW

Operating Cash Flow

 

(31.6)

(21.7)

(15.2)

(8.0)

(0.3)

Purchase of intangibles and capex

(1.1)

(1.2)

(4.3)

(7.6)

(3.3)

Acquisitions/disposals

(9.6)

0.0

0.0

0.0

0.0

Financing

11.8

16.7

0.0

4.3

1.0

Other

0.0

0.0

0.0

0.0

0.0

Exchange adjustment

0.4

0.5

0.9

0.2

(0.0)

Discontinued operations

9.1

0.0

0.0

Change in cash

(30.0)

(5.6)

(9.5)

(11.1)

(2.6)

Opening cash

62.7

32.6

27.0

17.5

6.4

Closing cash

32.6

27.0

17.5

6.4

3.8

Debt

0.0

0.0

0.0

0.0

(1.0)

Net cash/(debt)

 

32.6

27.0

17.5

6.4

2.8

Source: Tungsten Corporation, Edison Investment Research. Note: FY16 net cash in the cash flow table includes cash at Tungsten Bank that was classified as an asset held for sale in the balance sheet. FY17 cash flow includes a net positive item of £11.2m relating to cash released from the sale of Tungsten Bank after deducting £20.6m cash held in the disposal group. Total cash released was nearly £30m. Tungsten Bank was treated as a discontinued operation in FY16.

General disclaimer and copyright

This report has been commissioned by Tungsten Corporation and prepared and issued by Edison, in consideration of a fee payable by Tungsten Corporation. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Tungsten Corporation and prepared and issued by Edison, in consideration of a fee payable by Tungsten Corporation. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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