Tungsten Corporation. Focusing on growth and efficiency. AGM update. Outlook. Valuation. Company update. Financial services

Transcription

1 Tungsten Corporation Focusing on growth and efficiency Company update Financial services Tungsten Corporation remains in its investment phase as it builds out its e-invoicing and related services. However, a little over a year since the appointment of Rick Hurwitz as CEO, there are real signs of operational progress with price increases, greater focus underlined by the expected sale of Tungsten Bank, and reorganisation and technology investment to achieve efficiencies. This should help deliver operational gearing and a move into EBITDA profitability during CY17 as Tungsten capitalises on the growth potential in the e-invoicing and related markets. 19 October 2016 Price 62.00p Market cap 78m Net cash ( m) at 30 April Shares in issue 126.1m Free float 69% Code TUNG Year end Revenue ( m) EBITDA ( m) EPS (p) Net cash ( m) Buyer numbers Supplier numbers (000s) 04/15* 22.5 (25.2) (26.9) / (18.7) (22.5) /17e 30.1 (13.9) (14.0) /18e (1.2) Note: *04/15 as restated. Tungsten does not currently pay a dividend. Primary exchange Secondary exchange Share price performance AIM N/A AGM update In its recent AGM update Tungsten confirmed that the current financial year has started well and that it has continued to implement its strategic plan involving greater focus, operational improvements, relaunching invoice financing and developing related services. The sale of Tungsten Bank is still on track for completion shortly and it will release significant cash to support the group on the path to profitability and cash generation. Importantly, the process of negotiating higher prices as contracts for e-invoicing renew has continued and, in FY16, 34 buyer contracts were renewed with a weighted average increase of 64%. This process has continued in the first quarter of FY17. Progress is being made on cost reductions, while investment in technology is also being made to secure further efficiencies that should have increasing benefits as volumes rise. Outlook At the AGM management also confirmed its confidence in meeting its FY17 objectives including revenues of 30m, a reduced EBITDA loss of 12-14m and an end-of-period cash balance of over 20m. On a longer view, the potential for increased penetration of e-invoicing in preference to paper or -based processing still suggests substantial opportunities for Tungsten and its competitors. This, allied with evidence that Tungsten can secure better prices for this service, is encouraging. The ability to add income from adjacent services has yet to be fully proven, but does hold the potential to accelerate the move to profitability. Valuation Valuing a company at Tungsten s stage of development remains difficult but, at less than 2x enterprise value to revenues and trading on an implicit discount rate of 18% (subject to delivery of our cash flow estimates see page 5), there is still interesting upside to balance risks, even after marked share price strength year to date (+64%). % 1m 3m 12m Abs Rel (local) (2.3) week high/low 77.0p 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 events FY17 interims 15 December 2016 Analysts Andrew Mitchell +44 (0) Martyn King +44 (0) Julian Roberts +44 (0) financials@edisongroup.com Edison profile page Tungsten Corporation is a research client of Edison Investment Research Limited

2 Company description: Building on e-invoicing network Tungsten Corporation was established in 2012 and listed on AIM in At flotation it had agreed the acquisition of an e-invoicing business, OB10, itself founded in 2000, and a bank. The aim was to develop the established, multi-national e-invoicing business network and to offer additional services such as data analytics and, through the bank, invoice discounting to buyers or suppliers on the network. The business completed the acquisition of Tungsten Bank in 2014 and developed the Tungsten Network post-flotation, including the purchase of a business specialising in the automation of accounts payable (DocuSphere, now renamed Tungsten Workflow). The core e-invoicing business provides a network service for buyers and their suppliers that generates electronic invoices enabling automated straight-through processing. This is not possible with an ed pdf, for example, and fraud prevention is another important benefit of adoption. E- invoicing can reduce buyer invoice processing costs by as much as 60% (source: Tungsten), while suppliers also gain in terms of efficiency and improved visibility of the status of their invoices and the expected payment date. Tungsten Network generates its revenues through charging initial setup fees, subscription fees and per transaction fees. The fixed element of fees accounts for 60-70% of revenue. At end April 2016 there were 175 public and private sector buyers (39% of revenue) and over 203,000 suppliers (60% of revenue) on the network. As Tungsten moved beyond its start-up phase the board recognised the need to contain the rate of cash depletion and improve operational performance. To this end, Rick Hurwitz, previously head of Tungsten Network US, was appointed as chief executive (July 2015). Hurwitz undertook a strategic review to help address the mismatch between delivery and stock market expectations. As part of the reappraisal, Tungsten decided to sell Tungsten Bank because its agreement with Insight Investment (part of Bank New York Mellon) provides sufficient funding for the invoice finance offering, so the cash tied up in the business and costs of running a regulated bank were not justified. The sale was agreed in December 2015 and is set to be completed shortly with c 30m of cash to be released, with an annual net cost saving of 2m also expected. Subsequently, the invoice financing offering (Tungsten Network Finance) has been revised under the leadership of Prabhat Vira, an experienced trade financing executive who joined Tungsten this year. The funding partnership with Insight Investment, initiated in 2014, has been reaffirmed and expanded while further partnerships will be considered where appropriate. Under the partnership agreement, Insight Investment provides funding for supplier finance, while Tungsten receives a share of the income generated. Initiatives taken or underway at Tungsten Network include: Increased standardisation of contracts and revenue model for buyers. Increased pricing to reflect the value provided more fully. Increased interaction with suppliers and offering additional products such as international payments to help monetise the network. Enhancing partnership relationships to increase buyer and supplier sales opportunities. Increased focus on product development to improve the services provided to customers. Organised teams with end-to-end process responsibility rather than separation into buyer and supplier sections. Progressive updating of the network technology to a modular system enabling increased flexibility and facilitating greater automation. The technology change is a key component in the continuing measures to contain costs and achieve greater operational leverage. This can be illustrated in the process of supplier onboarding, Tungsten Corporation 19 October

3 where the use of artificial intelligence and introducing the capability for suppliers to sign themselves up can reduce errors and manual intervention substantially. Full year results and AGM statement A summary of Tungsten full year results to end April this year is shown in Exhibit 1. Revenue was 16% above the previous year and, after adjusted costs (down 6%), the EBITDA loss was 26% lower at 18.7m. There was a non-cash 6.8m impairment item relating to Tungsten Bank, which was the main reason for a marginal increase in the loss at the operating and post-tax levels. Exhibit 1: FY16 P&L results summary Year to end April ( 000) Change (%) Tungsten Network 22,429 25, Tungsten Network Finance (primarily Tungsten Bank) Total revenue 22,549 26, Adjusted operating expenses (47,779) (44,831) (6) EBITDA (25,230) (18,748) (26) Depreciation/amortisation (2,263) (2,520) 11 Share-based expense (195) (478) 145 Impairment (Tungsten Bank) - (6,810) Other income Operating loss (27,688) (28,275) 2 Net finance costs (224) (288) 29 Taxation Post-tax loss (27,610) (27,858) 1 Basic & diluted EPS (p) (26.92) (22.52) Source: Tungsten Corporation The movement in operating expenses (a c 3m reduction) included lower one-off costs at 4.4m versus 6m (mainly relating to Tungsten Network Finance) and cost savings/bad debt reduction of 1.9m. Against this there was also investment in increased staff, system and marketing costs, making up the balance. Further detail on the performance of the main Tungsten Network business is shown in the next table. Buyer and supplier revenue were up 17% and 15% respectively compared with increases of 1% and 12% in the number of buyers and suppliers. While there were only two net additions to buyers there were 11 new companies added including Duracell and Sanofi. The nine buyers removed from the reported numbers included three with little invoice volume as Tungsten increased its focus on customers with growth potential, three as a result of mergers and three where local contracts were replaced by global contracts. The pick-up in revenue per buyer, supplier and per invoice can be attributed to a combination of mix, success in negotiating higher prices on contract renewals and the introduction of standardised supplier pricing. Tungsten Corporation 19 October

4 Exhibit 2: Tungsten Network FY16 performance Year to end April ( m) Change (%) Buyer revenue Supplier revenue Total revenue Administrative expenses (28.2) (31.7) 12 EBITDA (5.7) (5.8) 1 Add back one-off costs (75) EBITDA before exceptional items (2.9) (5.1) 76 Number of: Buyers Suppliers 181, , Invoices (m) Revenue per buyer ( ) 55,246 57,224 4 Revenue per supplier ( ) Revenue per invoice (p) Source: Tungsten Corporation, Edison Investment Research Tungsten renewed 34 buyer contracts due for renewal during FY16 at a weighted average increase of 64% confirming the value of the service provided. At the time of the results, the company indicated that a further four buyers had renewed with similar increases and that a further 10 buyers extended their existing contracts but were in negotiation on new terms when they expire. At the AGM Tungsten confirmed that contract renewals at higher prices have continued and also that three new buyer contracts have been signed. Supplier additions are also reported as running at an encouraging pace, with suppliers signing up to use the integrated solution service (machine-tomachine processing versus manual web entry) running at twice the rate in the same period last year. Integrated solution suppliers account for the majority of supplier revenue. During FY16 invoice financing of over 100m was arranged with an average duration of 34 days generating an average gross yield of 6.3%. Total financing fees (for the Tungsten Network Early Payment product) were 611,000 compared with 153,000 last year and this was allocated between Tungsten Network Finance ( 14,000), Tungsten Bank ( 180,000) and Insight Investment ( 417,000). Given the prospective sale of the bank, Tungsten Network Finance and Tungsten Bank have been separated in the FY16 segmental presentation. The EBITDA loss for Tungsten Network Finance was reduced from 10.6m to 3.8m, reflecting lower one-off costs while the loss at Tungsten Bank was 2.6m versus 2.1m. Prospectively, following the sale of Tungsten Bank, Tungsten Network Finance is set to generate all or most of its income from fees arising from its partnership with Insight Investment. The final element in the group EBITDA loss of 18.7m as shown in Exhibit 1 was the central item where the corporate EBITDA loss was 6.6m, slightly below the 6.8m for FY15. In addition to the indications of continued momentum in buyer and supplier sign-ups, Tungsten s AGM statement confirmed a positive start to FY17 with cost-saving measures, the sale of Tungsten Bank and progress towards performance objectives (see next section) all on track. The company also noted the recent launch of an international payment product to be offered to selected suppliers. Even though revenues are likely to be relatively small in FY17 the service, provided with a partner company, should help strengthen supplier relationships and represents a template for future add-on services. Outlook and company guidance The potential for strong growth in the e-invoicing market remains in place (see our initiation note published in January), reflecting rising penetration of invoice processing spurred by the significant cost-savings and fraud mitigation available by switching from paper or -based systems. In addition to realising operational leverage as e-invoicing revenues rise, Tungsten aims to derive Tungsten Corporation 19 October

5 growing income from invoice financing, procurement spending analysis and by offering additional adjacent products to network subscribers. In the nearer term Tungsten has provided guidance that includes expectations for revenue, costs and EBITDA for FY17. Expected revenue of at least 30m with upside subject to rate and timing of client sign-up. Operating costs expected to fall with automation, staff reductions and procurement efficiency. Commitment to monthly EBITDA profitability during calendar FY17 EBITDA loss of 12-14m expected including a pre-disposal loss on Tungsten Bank of 1.3m. FY17 year-end cash of over 20m expected. Tungsten Network Early Payment financing levels expected to double by end FY17, with main revenue benefit to come in FY18. Our estimates are framed to be consistent with this guidance, with an overview of group expectations shown in the financial summary (Exhibit 8) and key elements of the forecasts for Tungsten Network set out in the next table. Among the points to note here are the assumption of continued growth of over 10% in suppliers and the arguably conservative growth in the number of net new buyers prospectively (7% and 8% in FY17 and FY18 respectively). The significant percentage increase in revenue per buyer reflects the progressive impact of repricing as contracts come up for renewal. So far the signs on this are encouraging but this is among the key sensitivities of the revenue estimate and hence profitability. While costs appear to be held steady in FY17, we assume there is an underlying cost reduction with some one-off expenses that fall away during FY18. The estimated growth of 10-12% in invoices processed reflects a combination of growth in the existing user base and the addition of new buyers and suppliers while revenue per invoice is also set to benefit from the repricing of contracts. Exhibit 3: Tungsten Network key points from estimates Year to end April ( m except where stated) e 2018e Supplier revenue Buyer revenue Total revenue Administrative expenses (28.2) (31.7) (32.0) (25.0) EBITDA (5.7) (5.8) (2.4) 10.7 Suppliers -end period (number) 181, , , ,000 % change in average suppliers 13% 10% 13% 13% Revenue per supplier ( ) Buyers - end period (number) % change in average buyers 27% 13% 3% 7% Revenue per buyer ( ) 55,246 57,224 65,410 79,791 Increase in revenue per buyer 71% 4% 14% 22% Total number of invoices (m) % change in no. invoices 12% 9% 10% 12% Revenue per average invoice ( ) Source: Tungsten Corporation, Edison Investment Research Exhibit 4 sets out the potential growth in Tungsten Network Finance revenue and assumptions on the level of invoice financing that lies behind this. Extending the trends we have shown would point to a move into EBITDA profitability in 2020, but the expansion of the funding agreement with Insight Investment, and changes in the sales team and in the product to widen the number of suppliers that can use it, means it could generate more rapid growth than we have assumed. Tungsten Corporation 19 October

6 Exhibit 4: Tungsten Network Finance Year to end April ( m except where stated) e 2018e Total revenue Administrative expenses EBITDA Total value of invoices financed Average lending balance Source: Tungsten Corporation, Edison Investment Research Financials At end FY16 Tungsten had net cash of 27.0m ( 32.6m end FY15), which included 17.8m of cash at Tungsten Bank that is set to be released on completion of the disposal. A further 12.2m will be released on the sale from financial receivables and goodwill. A 10m revolving facility has been agreed to provide additional flexibility in the event the sale is delayed. As shown in Exhibit 5 our forecasts point to cash of c 20m for FY17 and FY18. The FY17 figure is consistent with Tungsten s own objective while, as the table shows, the FY18 estimate hinges on a substantial improvement in operating cash flow as the various strategic initiatives in place become evident in revenues and costs. Exhibit 5: Simplified cash flow analysis e 2018e Net operating cash flow (21.6) (17.1) 1.7 Disposal (Tungsten Bank proceeds of 30m less cash of 17.8m) Equity issue Other cash flows/fx movement (0.7) (2.0) (1.0) Change in cash (5.6) (6.9) 0.7 Opening cash Closing cash Source: Tungsten Corporation, Edison Investment Research Exhibit 6 provides a brief summary of changes in our estimates since publication of the FY16 results. While there are large percentage changes, these should be viewed in light of the developmental status of the business with significant change and growth taking place giving the potential for a swing into positive cash flow and profitability over the next two or three years. Exhibit 6: Performance versus forecast and estimate revisions Revenue ( m) EBITDA ( m) EPS (p) Net cash ( m) Actual Forecast % diff. Actual Forecast % diff. Actual Forecast % diff. Actual Forecast % diff. 04/ (5.9) (18.7) (18.0) N/M (22.5) (21.2) N/M (18.6) New Old % chg. New Old % chg. New Old % chg. New Old % chg. 04/17e (12.8%) (13.9) (9.8) N/M (14.0) (6.1) N/M (30.4%) 04/18e 37.1 N/A N/A 2.4 N/A N/A (1.2) N/A N/A 20.9 N/A N/A Source: Company data, Edison Investment Research Valuation As in our January 2016 initiation note, we have used a DCF valuation model to gain a sense of the discount rate that is implied by the current share price, given our cash flow assumptions. Since early January the share price has increased by over 60% to the current level of c 60p. Our cash flow estimates have also changed with a larger initial outflow as Tungsten continues its cashconsuming investment phase. On the other hand, we have higher cash inflows in the final two years of our explicit forecast period (FY19 and FY20). We have increased our long-term growth assumption from 3% to 4% to make some allowance for potentially substantial growth in Tungsten Network Finance that is not captured in our forecast period. Even after the substantial share price Tungsten Corporation 19 October

7 appreciation our model still suggests an implicit discount rate of 18% compared with 24% in January. Exhibit 7 sets out the valuation output of our model using different discount and long-term growth assumptions centred around the current share price. The substantial variability of outcome for different projected cash flows means that this table only partly captures the range of values that can be reasonably justified. As a further example, if we were to apply a 5% growth rate within our model (consistent with a possible acceleration in growth) and a 10% discount rate, this would give a valuation of c 200m (157p per share) and an EV/revenue multiple of c 5x. Exhibit 7: DCF output variations (value per share, p) Long-term growth rate 2% 3% 4% 5% 6% Discount rate 15% Source: Edison Investment Research 17% % % % To put this EV/revenue multiple in context, we note that one peer, Basware, trades on nearly 4x annualised H116 revenues, while another, Coupa Software, was recently listed on Nasdaq and trades on a revenue multiple of c 9x, again based on annualised H1 revenues. In addition, given the nature of the e-invoicing business, where network benefits and scale are important, consolidation may be expected as the market becomes more mature and we have previously cited enterprise value to revenue multiples of 2.7x to 7.6x for transactions involving Basware and SAP. By comparison, Tungsten trades on below 2x based on the current market cap, together with yearend cash and projected revenues for FY17. Completion of the bank disposal and further progress in the execution of the strategy of focus and increased operational efficiency should help underpin the value indicated, either from the DCF model (through a moderation of the required discount rate) or the simple EV/revenue measure (less risk for an acquirer, for example). Tungsten Corporation 19 October

8 Exhibit 8: Financial summary 30 April (IFRS) m e 2018e PROFIT & LOSS Supplier revenue Buyer revenue Tungsten Network Tungsten Network Finance Tungsten Bank Group revenue Tungsten Network (e invoicing) (28.2) (31.7) (32.0) (25.0) Tungsten Network Finance (10.6) (3.8) (4.0) (3.0) Tungsten Bank (2.2) (2.8) (1.4) 0.0 Corporate centre (6.8) (6.6) (6.6) (6.7) Group administrative expenses (20.9) (47.8) (44.8) (44.0) (34.7) Tungsten Network (5.7) (5.8) (2.4) 10.7 Tungsten Network Finance (10.6) (3.8) (3.6) (1.5) Tungsten Bank (2.1) (2.6) (1.3) 0.0 Corporate centre (6.8) (6.6) (6.6) (6.7) EBITDA (10.2) (25.2) (18.7) (13.9) 2.4 Depreciation & amortisation (0.8) (2.3) (2.5) (3.1) (3.2) Share based payment 0.0 (0.2) (0.5) (0.5) (0.5) Other income Intangible impairment (6.8) Operating Profit (10.9) (27.7) (28.3) (17.5) (1.3) Net finance cost (0.2) (0.2) (0.3) (0.2) (0.2) Profit Before Tax (IFRS 3) (11.1) (27.9) (28.6) (17.7) (1.5) Tax Profit After Tax (IFRS 3) (11.0) (27.6) (27.9) (17.7) (1.5) Average Number of Shares Outstanding (m) EPS - (IFRS) (p) (18.6) (26.9) (22.5) (14.0) (1.2) Dividend per share (p) EBITDA Margin (%) Network statistics Suppliers-end period 168, , , , ,000 Increase 13,000 22,000 28,000 30,000 Average suppliers 154, , , , ,000 Revenue per supplier Buyers-end period Increase Average buyers Revenue per buyer 55,246 57,224 65,410 79,791 BALANCE SHEET Fixed Assets Intangible Assets Other Current Assets Trade and other receivables Cash Other Assets held for sale Current Liabilities Trade and other payables Borrowing Deferred income Liabilities held for sale Long Term Liabilities Long term borrowings Other long term liabilities Net Assets CASH FLOW Operating Cash Flow (8.1) (31.6) (21.6) (17.1) 1.7 Capex (2.3) (1.1) (1.2) (2.0) (1.0) Acquisitions/disposals (74.7) (9.6) Financing Other (4.8) Exchange adjustment Change in net cash 59.2 (30.0) (5.6) (6.9) 0.7 Opening net cash Closing net cash Source: Company data, Edison Investment Research. Note: FY16 net cash in the cash flow table includes cash at Tungsten Bank that is classified as an asset held for sale in the balance sheet. Tungsten Corporation 19 October

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