Small Cap Value Report (Mon June 4 2018) - TUNG, AFHP, SEE, Knights Professional, Tekmar Group

Monday, Jun 04 2018 by

Morning folks,

I'm on the road, writing to you from a restaurant in rural Ireland. On the menu today we have:

Tungsten (LON:TUNG)

  • Share price: 52p (-5%)
  • No. of shares: 126 million
  • Market cap: £66 million

Trading Update

A trading update for the year ending April 2018:

  • "Achieved monthly EBITDA2 breakeven during H2-FY18"
  • "Operated profitably over January to April 2018 period"
  • "FY18 EBITDA loss narrowed to £4.6 million from £11.8 million in FY17"

The language used is a bit unfortunate - "monthly EBITDA breakeven" is not a thing.

Let's assume it means that the company was at EBITDA breakeven during some months, but not during others.

The next achievement: "operated profitably over January to April 2018 period" - again, this is awkward. Profitable businesses should have positive net income, not positive EBITDA. And focusing on the last four months of the financial year reduces the value of the claim.

Don't get me wrong - this is the best the company has achieved so far. But one short period of positive EBITDA does not a viable business make.

The company admits it has no idea when it will be positive on an EBITDA basis, from month to month:

The sales pipeline is well developed, although the nature of Tungsten's business is such that the level of conversion and the timing of sales on a monthly basis is unpredictable. While FY19 operating expenses are unlikely to exceed the levels of FY18, the ability to generate positive EBITDA in any month over FY19 will continue to depend on the quantum and timing of sales conversions as well as discretionary investment decisions in areas such as developing new products.

How about cash?

The EBITDA loss of £4.6 million plus capex resulted in a cash outflow of £11.1 million during FY 2018, leaving it with net cash at the end of the financial year of £6.4 million.

The Board considers that the Company has adequate working capital. In any event, Tungsten is able to flex discretionary spending should the expected level or timing of conversion of the sales pipeline into actual sales be behind management's expectations.

In other words - if sales don't materialise as…

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All my own views. I am not regulated by the FSA. No advice.

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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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AFH Financial Group Plc is an Independent Financial Advisor and Discretionary Investment Manager. The Company is a financial planning led wealth management firm. It offers a range of wealth management and financial planning services to its clients, including but not limited to investment management; pension and retirement planning; tax and inheritance planning; life cover and family protection, and mortgages. In addition, the Company offers Discretionary Investment Management services and operates two funds, the MGTS AFH Tactical Core Fund and the MGTS St Johns High Income Property Fund, which supports the Company's investment management offering to its clients. It provides wealth management advice and services to the mass affluent and high net worth private client market in the United Kingdom, as well as to a number of companies. more »

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Seeing Machines Limited is engaged in developing, selling and licensing products, services and technology to detect and manage driver fatigue and distraction, including continued market development to secure sustainable channels to market for the product. The Company's segments include automotive, off-road, fleet, aviation, scientific advance and other. The Company is also engaged in developing driver-monitoring technology to incorporate into passenger cars; entering commercial agreements with partners for the development, manufacturing and sale of products into target markets, and research and development of the Company's processing technologies to support the development and refinement of the Company's products. It also offers driver monitoring system (DMS) technology. more »

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

38 Comments on this Article show/hide all

LeoInvestorUK 4th Jun '18 19 of 38

Partial failure Mothercare (LON:MTC) 's CVA:
(edited)The implication from the RNS seems to be that the subsidiary is a limited company that they can let fail without threatening the rest of the group. But most importantly, could this be a sign landlords won't keep rolling over?

Blog: LeoInvestorUK
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ezlifeme 4th Jun '18 20 of 38

Re Seeing Machines (LON:SEE)
I think you will find that the EU is planning to add such "driver aids" to vehicles
Section 5 under heading Article 6

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dscollard 4th Jun '18 21 of 38

haven't followed Seeing Machines (LON:SEE) in a few  years : though made some money in it in the past. Worth noting it hit a high in 2014 at just shy of 10p so probably some overhang still around since then. If I was buying I'd want to see a good push through the old high with a bit of volume to give it welly.
Originally their driver monitoring technology was aimed at pretty big iron so BHP Billiton (LON:BLT) for example installed this in multi-ton mining rigs. Similarly there are applications in freight , construction plant etc. Many of these are fully loaded with tech already but are unlikely to go fully autonomous any time soon given implications of malfunctions which while low are potentially disastrous. The CEO of Seeing Machines (LON:SEE) has a good background and a bit of a track record of highly lucrative exits by getting his companies acquired. I'd imagine that is still the likely fate for Seeing Machines (LON:SEE) but again, haven't looked at it in years so may be out of date. Their pipeline is lumpy as hell which combined with low liquidity makes it a bumpy ride

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Paul Scott 4th Jun '18 22 of 38

Hi Graham,

Excellent article. I completely agree with your views on Tungsten (LON:TUNG) . The company has a long history of over-promising & under-delivery, fundraisings, plus putting a lot of spin on its trading updates, making them sound more bullish than reality turns out when the next set of figures comes out.

Therefore I would never buy TUNG on a trading update, but would prefer to wait until the proper accounts show a genuine turnaround.

It seems to me that TUNG is struggling to get anywhere near breakeven, over a long period of time. That suggests to me that it's probably not a very good company, and has limited growth potential. So very much a stale story as things currently stand.

I got suckered into the original story a few years ago, when it was hyped to the sky by the pompous Edi Truell. It's nearly always a mistake to revisit old, failed story stocks. 

Best wishes, Paul.

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JamesHolmes 4th Jun '18 23 of 38

In reply to post #369559

Based on those impending milestones, today should be the glory days then, but I don't 'see' that in their accounts!

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IGotPoesJacket 4th Jun '18 24 of 38

Seeing Machines (LON:SEE)
I’m not “seeing” it. It’s just a camera and software. 10years ago dedicated kit would be necessary, now I bet you can get an app that does this kind of thing, thus I suspect margins will be wafer thin.
What am I missing?

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Graham Ford 4th Jun '18 25 of 38

In reply to post #369589

Take a look at what Rio Tinto (LON:RIO) are doing with driverless. They have already implemented it in several places.

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Graham Neary 4th Jun '18 26 of 38

In reply to post #369549

You're very welcome, Paraic! G

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Graham Neary 4th Jun '18 27 of 38

In reply to post #369504

Cheers Julian. Yes, I had a fantastic full breakfast with pancakes & orange juice - perfect start to the day.

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Graham Neary 4th Jun '18 28 of 38

In reply to post #369594

Thanks Paul. Yes, Tungsten (LON:TUNG) has an awful lot of spin but at the end of the day, its tangible achievements don't quite match its rhetoric. It's a shame.

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Graham Neary 4th Jun '18 29 of 38

In reply to post #369529

Thanks Andrew, I do wish Tungsten (LON:TUNG) all the best and agree with you that existing management seem pretty good. Isn't there a phrase about good management and bad businesses, and reputations staying intact...?

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JohnWigg 4th Jun '18 30 of 38

The IPO intention by Tekmar caught my eye, as it's potentially the kind of investment I like.
However, their 2016 accounts (Companies House), though quite complete don't inspire confidence, with a trading loss, huge intangibles and shareholder net deficit.
Does the phrase "adjusted EBITDA" ring any alarm bells? Sometimes.
Is this an example of a float for the benefit of the company rather than its potential shareholders?

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cholertonandrew 4th Jun '18 31 of 38

In reply to post #369649

Thanks Graham, I appreciate the reply. There was a lot of interesting feedback on Tungsten on Glassdoor which thankfully helped me keep my position very small. I am a bit nervous about their growth prospects and I do believe it’s a very competitive sector now.


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DurhamMike 4th Jun '18 32 of 38

Tekmar is an interesting case - a quick review of the subsidiary accounts and parent co accounts from 2017 shows that the trading company is profitable to the tune of the EBITDA quoted in the intention to float, but that the holdco is loaded with very expensive shareholder debt - 14% by my maths. It might be an interesting offering if that debt is cleared in the IPO and the multiple is reasonable. If the oil/traditional energy services businesses have been so lucrative in the past, it might make sense for the same services to renewables to have a strong future.

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john652 4th Jun '18 33 of 38

Hi Paul & Graham,

Tungsten Tungsten (LON:TUNG) , same here, taken in by Edi Truell and his great marketing machine, but in the end what a complete disaster. I was very surprised at how badly it went, Truell did some really good work with consolidating expensive public service pension funds but what a load of spin. One of my worst losses and a reminder of why I avoid story stocks that make no profit. I still love the story, which its a good reminder in itself as to why I keep away from these type of stocks now.

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iain1234 5th Jun '18 34 of 38

In reply to post #369604

Yep, tend to agree I suspect LON:SEE are too late to the party. 10 years ago a camera that could recognise a smile and automatically take a photo was a wonderous thing. Nowadays your phone can do all that and stick comedy ears & beard on your noggin as well as anybody else in the picture. Its not going to take much for a car to recognise drowsy eyes and set off alarms.

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cw6365 5th Jun '18 35 of 38

Can anyone tell me where you can see an updated list of forthcoming IPO's, i can't seem to find one. Thanks.

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garbetklb 6th Jun '18 37 of 38

In reply to post #369459

OFEX:AFHP - it might also be quite difficult for people to buy, aside from any liquidity issues. I can't find anyone mainstream who will allow OFEX shares in a SIPP and 2 out of 3 of my providers won't allow them in ISA/Share dealing accounts either.......

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Weasel 6th Jun '18 38 of 38

In reply to post #369684

You weren't alone in getting burnt there Paul and John. I'll hold my hands up to that as well.

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 Are LON:TUNG's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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