Tungsten Corporation |
Resilience and promising partnerships |
FY20 update |
Financial services |
20 July 2020 |
Share price performance
Business description
Next events
Analyst
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 |
EPS |
EV/revenue (x) |
EV/EBITDA (x) |
Net cash |
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.
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