Small Cap Value Report (29 Jul 2014) - IND, TUNG, SNX

29th Jul '14 by Paul Scott

23 comments 21642 reads

Good morning!

People never say to me, which major institutions do you follow? My answer is usually the same - and following good advice from people who know what they're doing in small caps, the answer is - none of them!

The bigger you are, the more problems you have - companies butter you up, talk you into buying shares in Placings, and once you're in, you have career/reputational risk - i.e. to make any difference to your portfolio you've got to make a big mental commitment to (all too often) low quality management. That increases the likelihood of being wrong.

Once you're in, you can't get out - because of illiquidity, and the necessity to publicly announce each sale. So go over 3% at your peril - it might seem like a good idea at the time, but it's usually a mistake that is difficult to undo. Wise people stay just below 3%, as that leaves the door open to quietly changing your mind - an essential part of small cap investing. Even wiser (but less wealthy) people stay below 1% in my view, unless something really exceptional comes along.

I see that Standard Life have just gone below 3% at Indigovision (LON:IND). That might cause a temporary overhang, although I've not seen anything from their disclosures to indicate that they are at all shrewd. A new >3% holder has appeared called Inflection Point Investments Ltd. Their website is a Wordpress (2012 theme) amateurish blog that looks like something I would set up before lunch on a Saturday morning. So to channel Rik Mayall, whilst fighting the establishment, all I can say is "Thatcher!". Oh no, sorry. All I can say is, let's see what happens towards the end of this week. I am hoping for an upbeat trading statement from IndigoVision, based on the positive contract news announced on their website - there seems a lot of good news for a £38m company (at 514p per share).

Amazingly, I've been a continuous large IndigoVision shareholder since 2004! 10 years. This one was my first ever RNS, when I went over 3% in 2004 purely for ego reasons, and got so carried away, I ended up buying 8% of the company. It was tremendously exciting, as the shares 30-bagged on me, and made me about £5m profit in the good times, but I got…

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Paul Scott

29th Jul '14

Hi extrader,

Yes indeed, the running is going very well at the moment - I am jogging 3-6 miles almost every day along Brighton seafront, in preparation for the autumn's charity runs. It's surprising how nippy I am for a rotund middle aged chap!!

Going back to Inflection Point Investments Ltd, the way I read their RNS, it seems to me that Goldmans are just the nominee surely? So the investing decision is surely made by Inflection. Although their website is amateurish, just a Wordpress blog basically, I like their investing approach of "jumping the chasm" between new ideas & commercial reality. Easier said than done of course!

Regards, Paul.

bsharman

Hi Paul,

Sounds like you had a good night!! I await the Indigovision (LON:IND) trading statement with excitement and some anxiety! Interesting developments with this Goldman Sachs based outfit and Standard Life. Couldn't it be the same transaction? Anyway - there has been lots of positive newsflow on the Indigovision (LON:IND) website and hopefully the R&D spend is now beginning to reap the rewards. I read a very detailed and bullish interview with the CEO where he stated: "We are experiencing our best growth rates since 2009. Every single part of our business globally is growing. Asia Pacific is having its best year ever – the highest rate of growth we’ve ever achieved. Very strong – 50 per cent growth. We recently broke into Macau winning a system for the Grand Waldo Casino." Hopefully the numbers will support this.......... TBC........

Cheese on toast for breakfast?

Cheers,

Ben

Hi Mark,

Very useful feedback on Tungsten (LON:TUNG) especially as you have experience of using their software. Dangerous words, but I would almost go as far as saying that the revenues & losses from the OB10 software don't matter - it's the invoice discounting lending margin on hundreds of $billions of e-invoices in the future which is so exciting & potentially lucrative on a scale which is mind-boggling if they pull it off. Having said that, competitors must be integrating e-invoicing & invoice discounting too? e-invoicing on its own is of no interest whatsoever, there must be loads of companies doing that. It's combining large corporate buyers with the invoice discounting facility that is ground-breaking, and I think if TUNG can move fast, they could create something extraordinary.

This one really is very speculative though, so I am worrying myself over how excited I've got about the potential here - which is usually a mistake, as such excitement leads one to override the usual sensible risk controls about position size, etc.

Regards, Paul.

medlar

Inflection Point Investments is run by Charlie Elliott, ex-Goldman Sachs tech analyst back in the dot com boom, so probably has a similar history/knowledge of following IndigoVision as you do. Probably just uses Goldman to execute his trades.
Other notable UK tech stakes his fund holds include Bango, XLmedia and EagleEye.
BTW I wouldn't judge an outfit by the source code of its website, it's more how deft you are with the CMS - they probably can't be bothered with/afford a decent webmaster.There are plenty of great websites built on chunks of WordPress (Forbes, BBC America). As to the use of the 2012 wptheme this is incredibly popular and free. It's also used by Porta Communications, which I believe you hold… and they use it quite stylishly

extrader

Hi again, Paul,

It looks like you may be right and that Inflection Point is an exGS investment fund. That being said, the CV of the principal isn't too shabby :

..... Charles Elliott, (1985) joined Goldman Sachs to start and run their Japanese Equity Research Department, with a strong continuation of this work. Key ‘multiple-bagger’ recommendations made over the period included Nintendo, Tokyo Electron, Shimano and Unicharm. In 1992 Charles moved back to Europe, remaining with Goldman Sachs, where he ran the Special Opportunities/Emerging Growth research products for 15 years, a period during which he was more specifically focused on Technology.

Must have been doing something right to have lasted that long at GS !

Their fund performance over the last few years seems OK, too.

We shall see.... !

ATB

Ramridge

Hi Paul -
Re. Tungsten. I bought a few shares in this company a few months back because of the potential. Almost all advanced countries have committed to e-invoicing in public procurement, and the EU is moving to an end-to-end e-invoicing system, mandatory if you want to do business with them in future - albeit it would take a few years to get there. The benefit to businesses and governments is a no-brainer.
But, to keep feet on the ground, Tungsten is a minnow and there are some very large competitors such as IBM and Ariba. Nevertheless I am impressed by Tungsten's list of blue chip companies they have already enlisted - today's being BT. Personally, this share is on the right side of the risk/ reward ratio and I am happy to stick with it for the medium term.
Regards, Ram

Funderstruck

Paul,
Your 1%-3% rule for small caps is very helpful; if one limits investment to stocks below £250m Cap, would you only go 1% for the micro caps and go to higher limit for the top end. Also if one had a second fund for small to midcap stocks would you still apply the same rule or simply limit the total number of stocks across both funds to about 40 in total?

FREng

Paul

Treatt (LON:TET) released their Q3 IMS today.

mikehunt

I think we need to remember who is in charge of Tungsten – he is no mug!!

Edmund Truell, Chief Executive Officer
Edmund has over 30 years of financial services experience including leadership positions in banking, private equity, pensions, insurance and debt investment. He trained at Bankers Trust Co in New York, following which he was appointed a Director of Hambros Bank in 1991; Chief Executive of Hambro European Ventures in 1994; led the 1998 buyout and formation of Duke Street Capital (“DSC”); and was responsible in 2000 for creating and building DSC Debt Management. He was Chairman of the British Venture Capital Association from 2001 to 2002. After selling out of DSC in March 2007, he co-founded a regulated insurance company, Pension Insurance Corporation, which now has over £9 billion in assets under management and has insured some 90,000 pension fund members. He was appointed as Chairman of the London Pension Fund Authority, with £4.8 billion of assets, inJanuary 2013. He is qualified as a Chartered Financial Analyst and is a Trustee of The Truell Charitable Foundation.

http://www.tungstencorporationplc.com/content/board

Hi "Mike"!

Absolutely - small caps are really all about backing management.
I've not met Mr Truell, but the feedback I'm hearing from his recent appearance at a Mello event is that he's a very confident, and credible chap. As you point out, he has a very impressive CV.
So he doesn't look like the usual AIM CEO dreamer.

It's the right side of risk/reward for me, as someone above nicely stated. So this one is high risk, but potentially huge reward. Definitely NOT for widows or orphans! I've taken a mid-sized long position in it - enough to make me a good slug if it works out, but not enough to cause major damage if it goes wrong.

Regards, Paul.

steveross2112

Re-Tung; I share the view the potential for this business is enormous. The e-invoice element is a trojan horse to drive the real value creator which is the discounting business. I attended a presentation the other week with them, I ran their numbers through my fag packet model. It is quite simply staggering, even if they do a quarter of their ambitions on the discounting front it is still huge. Their main job is to establish what the supply chain can stand in terms of financing, 2.5% on 45 days would be incredible but I feel it may be dreamland. My take is watch the newsflow, if the discounting business looks like it is gaining traction, they are a buy, even if they are twice the price.

Hi Steve,

Thanks for the feedback. My personal experience of "waving the chequebook" at suppliers (offering them immediate payment in return for a discount) is that 1% of invoice value is very appealing to many suppliers (in the rag trade though, where most suppliers are permanently skint), and you could push it up to 2% sometimes, to pay them about 30-40 days more quickly than usual.

So in my back of the envelope figures on Tungsten (LON:TUNG) I'm using those figures. You get to ridiculous, off the scale figures once you plug in $1 trillion+ invoice flow annually, which is "only" about 8 times what they are already doing.

Although as we've discussed before, the competition won't be standing still. Although with such large clients, I suspect once they are signed up & using the Tungsten system, it is likely to be in situ for many years - once big organisations are happy using any system that works well for them, and is good value, there's no incentive for them to change, so they don't.

So this could well be a highly lucrative land grab? Although it does seem too good to be true, so I keep questioning what have we missed? Another fundraising is likely in my view, but does that really matter, given the scale of the opportunity?

Regards, Paul.

shanklin100

Titon (LON:TON) IMS issued an 14:00 today. Now up nearly 25%. Prior to the RNS, Q, V, M and SR were 95, 84, 28 and 78 respectively. I imagine the latter two numbers will be rising sharply.

Cheers, Martin

Re-TUNG, Paul, I am well aware of the sense of 'missing something'. I guess these disruptive business models can have a blind spot which only reveals itself once a ramp up is well underway. Only time will tell.
A few more points;
1.Edi Truell has £40million invested, I suspect he won't do a rights issue, but they will need funds. So a bond is more likely.
2.$1 Trillion of flow is very possible. Next year an EU directive kicks in stipulating EU Govermental dept move to e-invoicing. There are 4 x German Gov't depts (they will be first) which alone will account for $1 Trillion of flow should Tungsten land them.
3. I think your experience in the rag trade is interesting. Different sectors have different cash flow demands, with that will stand differing levels of finance costs. They need to identify where the sweet spots are...sustainably. This is Wonga loans on an industrial scale.

I love the idea, but ideas don't make any money...I have a toe in the water but trying to keep a healthy perspective!

Re. TUNG. For those who seriously want to understand and analyse this company, I highly recommend reading their admission document (can be downloaded from their website). Pretty in-depth SWOT analysis, competitor analysis and detailed explanation of their three-pronged strategy, e-invoicing + e-discounting + e-analytics. What could go wrong? Lots. Remember first movers with disruptive technologies do not necessarily win the big prize.
Regards,Ram

cig

The willingness of the suppliers to take that deal in the zero rate era may differ from a few years back (1% for 30 days is a much better deal when the base rate is at 5 or 6%...). Surely there are other participants in the markets chasing such invoice discounting on behalf of frustrated yield seekers.

It's been said it's a captive market, but it's not because the invoice has to be pushed on their system that the suppliers can't get funded elsewhere. It's easy yes, but if the terms are not competitive it might not stick. The captivity is similar to that of people being offered hotels or car rental when booking a flight with Easyjet. Not everybody takes up the offers.

Still it has scope to do well even if it only gets a fraction of the market at tighter spreads, and as a trading punt it could jump around quite nicely if people (over)value it at the optimistic end (for a while).

cyberbub

TUNG looks interesting indeed. It is no longer a small-cap at £300M-odd really, but as people say if it breaks into the big time then that market cap will seem like peanuts. One of the posters above mentioned that even loading an invoice onto the system incurs a small fee for the invoicer, so that should provide a fair bit of revenue towards the fixed costs of running their system.

I have not really looked at TUNG, but I intend to do so shortly, following Paul's review above!

Tungsten (LON:TUNG) strikes me as something like Monitise (LON:MONI), who have done a land-grab on mobile payments over the last 5 years. The problem is with MONI that they have done frequent major dilutions, so although the market cap has increased dramatically, the SP hasn't! That's the risk I suppose... at least as long as the SP doesn't go *down* :-o

I mentioned this company about 3 months ago on here, but has anyone looked at Quadrise Fuels International (LON:QFI) ? A similar company in many ways to TUNG, same market cap as TUNG, no debt, currently loss-making but on the verge of moving into revenue generation with an absolutely staggering marketplace. The most recent RNSes indicate that they will over the next 6 months roll out their new fuel widely across Europe, working with Maersk Line, the world's biggest shipping company, an undisclosed oil major (believed to be Exxon), and (in a different facet of the business) moving into trials with the world's biggest company, Saudi Aramco - and others (this implementation of their fuel is historically proven to work). Margins are very high, only modest need for future fundraising, and they could be making £200-300M+ pre-tax profit within 3-4 years. Worth checking out - but please DYOR and don't rely on me - I do have a holding there... no advice intended etc.

30th Jul '14

http://www.aviatelive.com/tag/tungsten/

stocktrawler

31st Jul '14

SCSW provides some very good reviews and insights into TUNG for those that have subscriptions.

smoking joe

1st Aug '14

Paul
"All I can say is, let's see what happens towards the end of this week. I am hoping for an upbeat trading statement from IndigoVision "
Results are on 17 September 2014 am I missing something concerning a 2nd interim report being this week?

Small Cap Value Report (29 Jul 2014) - IND, TUNG, SNX

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Paul Scott

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