Small Cap Value Report (16 Feb 2015) - DX., QFI, TUNG, ALLG

Monday, Feb 16 2015 by

Good afternoon!

A late reminder, it's the Mello Beckenham tonight, and I've got a couple more investor events to mention tomorrow.

DX (Group) (LON:DX.)

Share price: 95p
No. shares: 200.5m
Market Cap: £190.5m

Interim results - are out today, covering the six months to 31 Dec 2014.

This company may not be on many investors' radar, as it floated about a year ago, went to a decent premium to the 100p Placing price, but has since drifted downwards to now stand slightly below the IPO price. As with quite a lot of smaller caps recently, the chart appears to now be forming a base, and edging upwards. So it looks potentially interesting, in terms of timing, maybe?


The group's activities are a parcels/logistics group, but for niche items - e.g. time-sensitive, high value, oddly shaped items, etc.

Trading - the company says it traded in line with expectations in H1, and notes that there is a bias towards H2 with its typical trading. Both turnover and adjusted operating profit are slightly down, therefore it looks like a mature business.

I note that the group has an unusually strong operating profit margin, given that it operates in a competitive sector, suggesting that it has some competitive advantages. The £10.7m adjusted operating profit is a healthy 7.3% of turnover. That's very good for a freight/logistics company.

Balance Sheet - this is dominated by goodwill, so stripping that out, the NTAV is negative, by £11.6m. However, there is surprisingly little debt, with net debt reported at only £12.1m, which is modest compared with the level of profits. On closer inspection, it appears that the company has a favourable cashflow model, whereby customers pay up-front - this is revealed by the £22.5m deferred income shown in creditors.

Overall, I wouldn't describe this as a strong balance sheet, but given the company's decent cashflows, it's not worryingly weak either.

Outlook - nothing specific on trading is said, just a general update on their plans to integrate & develop various parts of the group.

My opinion - I particularly like the dividend yield here, and the business has an excellent operating margin considering the sector it operates in. However, the company's comments about email substitution have rattled me a bit, see below (I haven't got the hang of the highlighter tool…

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DX (Group) plc is engaged in the provision of parcels, mail and logistics services in the United Kingdom and Ireland. The Company's segments include parcels and freight, mail and packets, and logistics. The parcels and freight segment offers services, such as DX 1-Man, engaged in the delivery of irregular dimension and weight items; DX Courier, which provides next day parcel services, and DX 2-Man, which offers a business to consumer home delivery solution for heavier and bulkier items. The mail and packets segment comprises services DX Exchange, a business to business (B2B) mail service providing its customers with collection and delivery times; DX Secure, which provides security, and DX Mail, a mail service offering downstream access for smaller volume users. The logistics segment includes the provision of customer-liveried vehicles and uniformed personnel, such as fleet management solutions and integration with customer's business operations. more »

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Quadrise Fuels International plc is a United Kingdom-based company, which is principally engaged in the manufacturing and marketing of emulsion fuel for use in power generation, industrial and marine diesel engines and steam generation applications. The Company offers emulsion fuel multiphase superfine atomized residue (MSAR) as a substitute for heavy fuel oil (HFO). MSAR is a low viscosity oil in water emulsified synthetic HFO. It is manufactured using technology to mix heavy residual oils with small amounts of specialist chemicals and water to a bespoke formulation. The Company focuses on two markets: Marine MSAR, which is a replacement bunker fuel, and MSAR, which is a replacement HFO for stationary applications. The Company is the licensor of MSAR technology and offers integrated solutions for oil refiners and end users. The Company's subsidiaries include Quadrise International Limited, Quadrise Limited and Quadrise KSA Limited. more »

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Tungsten Corporation plc is engaged in e-invoicing, purchase order services, analytics and financing business. The Company's segments include Tungsten Network, Tungsten Network Finance, Tungsten Bank and Corporate. Its Tungsten Network segment includes e-invoicing and spend analytics business of Tungsten Network. The Company's Tungsten Network Finance segment includes the supply chain finance business. Tungsten Network connects buyers to their suppliers, enabling tax-compliant electronic invoicing. Its software translates and validates each supplier invoice, and allows suppliers to check invoice status online. All the users ' invoices are digitally signed, encrypted and stored within the Tungsten Network image archive, where the user can access them anytime. Tungsten Bank provides specialist banking products and services. It focuses on providing invoice financing solutions to small and medium enterprises (SMEs) in the United Kingdom, the United States and Europe. more »

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  Is LON:DX. fundamentally strong or weak? Find out More »

15 Comments on this Article show/hide all

Beginner 16th Feb '15 1 of 15

Re Quadrise Fuels International (LON:QFI) and oil-related investments in general, the statement from Hunting (LON:HTG) today is very revealing. It more or less says the oil analysts have failed to take into account the impact of low oil prices sufficently. They are still tending to over-estimate profits and margins for all those concerned, and the impact of the lower prices may be much longer lasting than anyone has yet realised. This is the clearest statement yet, to me, that things have still to get worse in this sector before they get better .

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jimbobjames2002 16th Feb '15 2 of 15

Hi Paul, I know exactly what you mean about Tungsten, its been a rollercoster ride of late. Can't help but feel that it's been testing the 200p support pretty hard - real battle of bulls and bears which has me a bit nervy! But I guess as a long term play I'll just have to tough it out in the short to medium term.

The stockopedia rankings look pretty awful too now, but I suppose they don't necessarily apply too much short term with a stock like this.

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rmillaree 16th Feb '15 3 of 15

Ref Tungsten

Strangely Paul's quote from the prior article probably perfectly sums up the problems with Tungsten.

"Blue sky stocks nearly always take far longer & cost more than planned to commercialise, if they commercialise at all. Bulls of this stock argue that it is more credible than most, due to big name partners who have expressed interest in the company's technology."

Looking at the revised broker estimates they have pushed profits back an entire year over the last 3 months - to the extent that profit is that far in the future (and also extra cash will be spent in meantime) this fully explains to the downward Spiral in share price as the company is showing tooo much "Blue Sky". As Paul alluded to- some Synety Type KPI figures every 3 months slapping us in the face (non wet fish variety) with the exceptional income growth potential is exactly what is needed.

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Ramridge 16th Feb '15 4 of 15

Re. Tungsten (LON:TUNG). I must say that after months of constant downward drift, I was looking for something more substantial than the win of Royal Caribbean Cruises for invoice processing. This together with the departure of Michael Spencer (an early serious investor leaving after a not very convincing reason) made me take the cautious step of halving my exposure this morning. Might well regret it, but it is all about risk management.

Regards, Ram

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rick 16th Feb '15 5 of 15

With Tungsten (LON:TUNG) Stockopedia VQM rankings all just above bottom quintiles it does not inspire

Value =20
Quality = 21
Momentum = 21
StockRank™ = 9

It is still early stage for TUNG but the fact hedge funds have recently been piling in on the short side have made me reconsider it as an investment.

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chemistdude 16th Feb '15 6 of 15

Re: Tungsten

I think whilst its fair enough we all want to know what profits to expect, we have to remember that we are in the middle of a land grab exercise. It is going to cost money and time to connect systems with the major buyers that are being signed up. They've only just finished putting the building blocks in place and arranging finance toward the end of last year.

I'd rather sign up more buyers (and therefore suppliers) in the short term at the expense of being profitable to ensure we obtain a dominant position in the market than signing up fewer buyers (slowing growth). I think they're doing the right thing by solidifying their market leading position. We need to grab the entire FTSE and Fortune companies. Having said that everything is in place now, we have billions to lend from the insight deal. As long as the revenues are funding the growth I don't mind another loss making year. 

As much as this is a finance/tech share we need to remember that the customers need to take up the tech first before the finance comes into play. In this regard market share is everything.

All good things come to those who wait.

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ExpectingValue 16th Feb '15 7 of 15

"There always seems to be some geopolitical disaster for this company. If a new war zone erupts somewhere, you can virtually guarantee that this company will be operating a cruise ship there, and will lose millions in bookings. This time it was Crimea. Previously it was Egypt "

Hah - sadly for the company, very true!

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janebolacha 17th Feb '15 8 of 15

In reply to post #92298

There are numerous other companies in the world offering something similar; I saw a figure mentioned of over 600 companies offering e-invoicing with quite a few also offering invoice discounting and some also spend analytics. I have been surprised that TUNG has not been getting UK companies to sign up en masse, tbh, given their claims and the backgrounds of their directors. However, the TUNG proposition seems actually not to be unique and that's perhaps why the take-up has been much slower then forecast by the company. On e-invoicing itself, they are unlikely to make money, it's effectively a loss-leader for the invoice discounting. On invoice discounting, the (very) big question mark, imo, is the margin they could get - I've seen people projecting that TUNG would borrow at 3% and lend at 8% or 9% and really I wonder how feasible that kind of margin actually is. Imo, the spend analytics is likely to be more complicated, time-consuming and costly than people are assuming; just think of all the different variables that can enter into a comparison of product offerings by different potential suppliers. On what I now know, I'd actually question the TUNG business proposition as an investment for quite some time ahead. Imo, it got traction as a kind of "story stock", fell back when people started to really understand the market context and now has to deliver before people will climb aboard once more. The comparison with other "tech story stocks" is quite striking, imo. For me, there may be a time to climb aboard but really I see no hurry to invest here unless transformative news comes out.

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janebolacha 17th Feb '15 9 of 15

Quite a good report here.
Have a look at slide 24.

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chemistdude 17th Feb '15 10 of 15

In reply to post #92307

Thanks for you reply Jane.

Edi Truell only considers SAP Ariba as true competition, this could well be potentially dangerous to disregard others out there. SAP aquired Ariba for $4.3billion, now valued at $7billion iirc. Despite Ariba being German and a behemoth compared to Tungsten (LON:TUNG) they were still beaten and got the deal with the German Government. Also customers like GE, the 2nd largest company in the world. You can't deny the fact they are winning contracts left and right, this is exactly what is needed, more invoicing revenues so more discounting can follow after the 6-9 months of plugging in with the buyer. Some of the deals are going unannounced too, e.g. Nestle was an existing buyer but only let tungsten operate locally, they have now signed up to global roll out though didn't want this publishing in an RNS.

I think where Tungsten is different is its a complete solution, you have e-invoicing, accounts payable automation, invoice status service, analytics, and finance all rolled into one. I think they also have an edge on tax compliance amongst the other types of country specific regulatory compliance and banking status. It would serve us well to remember that ob10 has been developing the e-invoicing solution since 2000 so it has had plenty of time to see through technical hurdles, compatibility with other software solutions etc which new comers to the market would potentially take time to overcome (not saying that they couldn't, but tungsten does have an advantage here). Also I believe they do 'line level' analytics, that is instead of categories like 'cutlery' they go as deep as 'knife' and 'fork'. Makes the tool much more useful.

The insight deal was stellar work by the management. Billions of finance with the risk all on insight. Who would give them billions at no risk unless the management/Edi was credible and could deliver?

All in all, Edi from his track record completely understands what the benefits of first mover advantage are and knows how to deal with cash burn too. He has put £30million of his own cash on the line and if there was not a profitable business to be made he wouldn't have done it. I think one has to really take a look into the future and draw from their own beliefs of whether they agree that Tungsten's management have the correct market leading/industry disruptive strategy and also whether they are the right company to deliver this vision. I'll boldly claim to agree on both counts.


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janebolacha 17th Feb '15 11 of 15

Mitesh, thanks for your reply.

Although initially I was attracted to the story, I'm rather more sceptical now, having researched it more thoroughly from sources beyond the company itself. I really can't see this as being particularly disruptive. The vision thing doesn't interest me, nor does the amount of money Mr Truell has invested in Tungsten. All that interests me is investing in a profitable business. I would much rather wait until there are signs of profits coming through, even if that means missing the first couple of chapters of the story. It's the conclusion that matters, the "happy ending".

All the best in your investing,

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chemistdude 17th Feb '15 12 of 15

Thanks Jane, you too. I agree with you 100% that it would be smarter/safer to invest once there are signs of profit because even at that stage there'll be plenty of upside to have.

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boothbym 17th Feb '15 13 of 15

In a few short months we will know how this is going to turn out.

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cig 17th Feb '15 14 of 15

On DX's legacy lawyers business, it does not seem particularly worrying: mail is already less than half of their revenue (and not all of that is the legal business) they understand and manage the decline, and this sort of thing tends to decline somewhat predictably (old habits die hard, the technology to make such mail redundant has been available for a decade or two after all).

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janebolacha 24th Feb '15 15 of 15

Paul, re your comments on TUNG, here's one link to someone else's analysis of the "economics of things".
I must say the conclusions the author draws rather mirror my own.

"Contract win - it's reassuring to see the announcement today that Tungsten has won a major new client, in Royal Caribbean cruise line, for its e-invoicing software.

We've discussed this company at length before, and I must admit to having gone a bit wobbly over it in recent weeks, as it became clear that things were taking longer, and costing more than planned.

That said, the core idea of creating a huge captive supplier base, and then offering it seamless invoice discounting, is a brilliant idea. Although on reflection the market cap probably got ahead of itself in mid to late 2014, as often happens with exciting concept stocks.

I'd like to see management firm up on the economics of things, rather than more of the flamboyant, but arguably over-promotional presentations of the past. It's all very well wowing investors with talk about hundreds of billions, and trillions, of invoice flow, but I think people are more interested in knowing how much profit will be extracted from the invoice flow."
- See more at:

Here's the link:


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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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