Small Cap Value Report (29 Jul 2014) - IND, TUNG, SNX
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 carried away and geared up the position at the wrong time (2007-8), just as the credit crunch was happening, and things went disastrously wrong after that - so important lessons were learned the hard way, about gearing, illiquidity & small caps - things which don't mix.
Still, it's all part of life's rich pageant.
Tungsten (LON:TUNG)
Don't ask me to value this one. It's very interesting indeed in my view - it's an invoice discounting company with a flow of multiple $billions via its loss-making e-invoicing software. This is highly speculative, but it could be spectacular in my opinion, if management pull off what they are trying to do - they have bought a leading e-invoicing software platform, and have also bought a small Bank, and are combining the two to offer invoice discounting facilities to the essentially captive supplier base of large corporates.
This share could be a 20+ bagger in my view, IF they pull it off. If they mess it up, then the shares could be a disaster. We shall see. It is likely to be loss-making for some time, indeed losses are likely to increase in my view. There's an interesting announcement today, although you have to unpick the wording very carefully;
BT started working with Tungsten Network, then OB10, in the UK in 2003. The company has now selected Tungsten to extend the benefits of e-Invoicing to all its suppliers across all entities.
"We are delighted that one of the world's early adopters of e-Invoicing has chosen to work with Tungsten to bring streamlined invoice processing and prompt payment to its global supplier base," says Edmund Truell, Group CEO. "This significant contract continues to reinforce our ability to help both large corporations and SMEs trade with confidence."
Is this as bullish as it sounds? Informed views in the comments below please! Or if I'm getting carried away (which is entirely possible) then you have permission to douse me with a bucket full of cold water!
Synectics (LON:SNX)
Enough waffling, let's get stuck into some figures. I'm really quite shocked by the interims today from CCTV company Synectics. They should have kept their previous name, which was classier, and easier to say, namely Quadnetics. Perhaps the (in my opinion) muddled thinking that led to such a bad renaming might be indicative of generally bad management? Who can say, I merely ponder.
I've been very sceptical about the valuation of this company for some time, so readers who were paying attention have been copiously warned. Here's my most recent review, after a profit warning on 25 Jun 2014.
The "underlying" loss of £2.5m for H1 reported today is in line with what they said on 25 Jun 2014. Although when you see the stark figures, and the lurch into a net debt position of £5.1m (from net cash of £1.2m at 30 Nov 2013), you start asking the unthinkable - could it go bust?
I'm seeing some red flags here actually. In particular, high debtors is always a very bad sign, and in this case £32m in "trade and other receivables" just looks way too high to me - it's an entire half year's turnover (£31.8m). It should be less than half that amount.
Also, I note that trade payables has gone up, from £22.6m at 30 Nov 2013, to £27.1m at 31 May 2014. That doesn't look right to me. Given that turnover reduced sharply in the last 6 months, then trade creditors should also have reduced. This suggests to me that the company might be stretching its creditors - i.e. having difficulty paying them possibly? I might be completely wrong, but these figures are ringing alarm bells in my head.
The company has been talking up expected H2 performance for a while. The order book of £32.9m at 31 May 2014 is up against £28.1m six months earlier, but not massively so. Also, who knows what is in there? An order book can be stuffed full of anything when times are hard. It's not a sale until the money is in the bank.
I'm not comfortable with these numbers, so am putting Synectics on my bargepole list. There may be nothing wrong, but to me, if in doubt, I steer well clear.
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23 comments
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?
SCSW provides some very good reviews and insights into TUNG for those that have subscriptions.
http://www.aviatelive.com/tag/tungsten/
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.
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
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!
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; 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.
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).
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.
Paul
Treatt (LON:TET) released their Q3 IMS today.
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?
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
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
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
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 Paul,
Thanks for your comments on Tungsten. It is an interesting business and I have bought a few in my SIPP on the basis I will either make a multiple of my investment, or lose it all, but overall I think this must have a positive expected value.
I have come across OB10 in a previous FD role. One of our customers essentially told us we had to use it or they couldn't do business with us any more (we decided not to call their bluff). It was quite painful to set up but it did at least guarantee prompt payment once our invoices had been accepted onto the OB10 system. The interesting thing was that we had to purchase "invoices" on the system, I think 50p for each invoice, despite the fact that it was our responsibility to get our invoices into OB10 in the first place. Presumably the customer paid OB10 also!
Although the e-invoicing business is currently loss-making it's possible therefore that this may be because of growth and hence a high level of set-up costs; it would seem that it should make a little money in its own right once growth eventually slows. What I like about the model is that the pain of going through the setup process should make customers very reluctant to move. The ability to then provide invoice discounting against what is typically a very blue chip customer base is a genius move imho.
As ever, only time will tell.
Best regards
Mark
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.
Morning Paul,
Any thoughts on "potential story stock coming good" Hydrodec? Interims/update this morning, market cap £90m, oil re-refining. Been around for ages. I was in and gave up on it a long time ago but I am finding myself drawn in again as it acquires new(ish) and rated management (ian Smale, Lord Moynihan), hits break even/ebitda +ve, files for patents, makes an interesting acquisition etc. It has the colourful entrepreneur Andrew "Bert" Black (of Betfair) as a 24% shareholder (and very enthusiastic buyer in the dips) in the last couple of years.
Just another high spec stock that needs to grow into its valuation, or a genuine multi bag potential?
Regards,
Mark
Hi Paul,
Hope the running is (still) going well !
Like you, looking forward to IND's next results announcement / update.
The new 3% stakeholder may be more significant than first appears : it's a Goldman Sachs owned entity whose investment strategy is :
" ... For a long holding the valuation should be sufficiently low, and the potential for earnings surprise sufficiently high, that we believe it has the potential to be a ‘multiple-bagger’ if held on a 3-5 year view. ..."
Let's hope their investment indeed proves to be at an 'inflection point' for IND !
ATB
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.