Disclosure: The author has a short position in one or more of the shares mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
A principal reason why I have a bearish stance on Tungsten (TUNG) is down to the the forward curve for Bank of England (or for that matter that the FED or ECB) policy rate expectations.
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Comments
webpax
Please see my responses enclosed in arrows beneath your paragraphs:
“And so it looks to me, that as well as seemingly overpaying for a loss making, cash absorbing, insolvent (according to its auditor) business, that Tungsten has also likely squandered – in the short term at least – a good £37 million in purchasing and brushing up a banking licence. Although it did get c. £20 million in short term gilts and other stuff.”
<<<<<<<Squandered?
One of the reasons for the purchase of the Bank was to allow Tungsten to take a global approach – something overlooked in your article where the focus is only on the UK market potential.
Being a UK regulated Bank allows them to provide capital in other jurisdictions. Also SMEs want a safe counterparty, Tungsten provides this as a regulated entity.>>>>>>>
“It might also lead some to think that as penetration is 9-10%, that Tungsten will automatically scoop this rate up on invoicing that passes across its network. Yet there are many, many invoice discount providers to choose from. In fact there are loads. The likely choice will be the invoice discount provider the supplier is already tied to/signed up/banking with (saving on any sign up cost, such as that 1% for due diligence).”
<<<<<<<There is no sign up cost for Tungsten Early payment so this argument can be reversed – using Tungsten avoids the sign up cost of other providers. And as your RBS slide illustrates there is an Annual review charge of circa 1% that could be avoided by switching to Tungsten.
Although as you say there are many invoice discount providers to choose from there are frictional barriers to overcome and multiple fees to pay. Your own RBS slide mentions five different fees including the £385+vat legal cost (incidentally not mentioned in your cost comparison calculations).
Tungsten removes all these barriers by making it very easy for suppliers to sign up online for early payment at no cost and with no obligation to use it. And when they chose to use it the cost is very transparent and the process painless. I believe many businesses that would want to avoid the hassle and cost of setting up a factoring service (and would prefer to max out their overdraft or credit card instead) will be very interested in this service.>>>>>>>
“I reckon it’s going to take Tungsten a long time to even come close to convincing as much as 25% of those OB10 UK based suppliers that use invoice discounting to switch to Tungsten. Especially the likes of FTSE 350 suppliers which will draw the big bucks, but may use it relatively infrequently anyway and when they do prefer to use their trusted, lower cost bank.”
<<<<<<<If they use it relatively infrequently then their trusted bank would not be lower cost. As your RBS slide illustrates the trusted bank charges an annual fee for continuation of the facility regardless of frequency of use. With Tungsten (also a bank) there are no ongoing fees.>>>>>>>
“And applying this to Tungsten’s UK example means 2.5% penetration of OB10’s £19 billion UK invoice value, or £475 million of invoice financing being advanced over a year. I.e. probably £10 million in net fees.”
<<<<<<<The above paragraph (and indeed other references throughout your article) imply Tungsten’s invoice financing market is limited to the UK. However this is not the case. Early payment is already live in the US (which is considerably bigger than the UK market) and they have a passport to expand into key EU markets (another benefit of the UK banking license).>>>>>>>
“I reckon Tungsten’s original strategy centred on low fixed capital costs drawn from institutional and corporate deposits and/or debt. And that they would make considerable returns against the backdrop of a rising interest rate environment, seeing the capital cost rise but their invoice discount rates rise rapidly higher.
And so this picture of modest rate rises over the next few years and protracted low rates thereafter probably presents an issue to what looks to me like pie in the sky market forecasts.”
<<<<<<<This is not correct. At the Half Year results (to 31/12/14) webcast it was made clear that while demand for invoicing financing tends to rise with rising interest rates, margins remain broadly constant regardless of the level of interest rates. (This was part of the work done with BoE to get the banking license approval).
Similarly it was stated that the effective funding rate under the Insight deal was not dissimilar to the Bank funding cost of the order of 3%.
Finally you make no reference to Tungsten Analytics. This is charged at 0.25%pa of invoice value analysed making it another potentially significant source of revenue for Tungsten (albeit as yet relatively unproven). Twenty-seven companies are currently trialing the service with one signed up already.>>>>>>>
@webpax1
B Sanderson
Shouldn’t you state how this article also appears on your own website?