Supply@Me Capital : Innovative inventory funding

SUPPLY@ME

(LON:SYME)

14 July 2021

Financials

Major Shareholders

Company Information

Address: Scott House, The Concourse, London SE1 7LY

Website: www.supplymecapital.com

Analyst Details

Ed Stacey ed.stacey@proactiveinvestors.com

Supply@Me Capital - Innovative inventory funding

Supply chain funding programmes moving forward

Supply@ME Capital PLC (LON:SYME) offers an innovative technology platform to provide inventory monetisation, which can enable a wide range of manufacturing and trading businesses to improve their working capital position (via a "true sale" of the inventory to special purpose vehicles) and also provides a new asset class to investors.

Supply@ME has a deep pipeline of inventory to be purchased from client companies - some €2.2bn equivalent of inventory to be monetised. During the remainder of 2021, Supply@ME intends to undertake monetisation strategies via the following routes:

• Supply@ME has entered into a term sheet with an Italian Banking Group to acquire 10% of the capital of a fintech licensed bank, with the option to acquire an additional 10% within the following two years. This direct investment will be aimed at having both a multi-annual funding plan and a client company origination alliance and will allow Supply@ME to start immediately arranging of the first inventory monetisation transactions in Italy. Details of this deal are were announced on 29 June 2021.
• The company has also agreed an exclusivity agreement with a global investment fund that will become the first external inventory funder for the Supply@ME inventory securitisation programme with reference to UK and UK common law client companies;
• Further tranches of inventory securitisation notes will be offered to the open market, including via a Shariah platform; and
• By virtue of the agreement with the Italian Banking Group, the company will accelerate the completion of self-funding agreements with other banks, which may co-operate closely with the fintech licensed bank

In addition to its pipeline of inventory monetisations, Supply@ME has a second revenue source coming on stream through its acquisition of TradeFlow Capital Management, which specialises in commodity trade finance, using a non-credit approach for inventory in-transit transactions, akin to Supply@ME's current platform offering for warehoused goods. This acquisition will provide the enlarged Supply@ME group exposure to an expanded international customer base, and a range of deal synergies, including with reference to funding options. The deal completed on 6 July 6 2021.

Financial outlook

Based on both the inventory securitisation programme and the TradeFlow deal, we expect strong growth in revenues for Supply@ME in 2021, driving a rapid transition to profitability, with further growth in the coming years.

Based on our forecasts of £50.1mln of revenue and £29.8mln of underlying earnings (EBITDA) by full-year (FY) Dec 2023, we believe that the current market capitalisation of £123mln leaves significant upside potential. For example if the market were to apply a 10x multiple to our 2023 EBITDA forecast, this would imply a market cap of £299mln, or 143% upside to the current level. We believe that there is potential for the shares to re-rate during the remainder of 2021 as the business plan progresses through its next stages.

Chief executive officer (CEO): Alessandro Zamboni

Zamboni specialises in financial services and related strategic and digital models. He has wide experience in advisory and training disciplines. He founded the AvantGarde Group, the parent company of Supply@ME, in July 2014. He is also co-founder of Assofintech, a fintech association representing more than 120 fintech companies in Italy. Prior roles include marketing consultant at L'Oréal (2001-2002); managing director (Milan) at NIKE (2003-2014).

Chairman: Dominic White

White has 25 years' experience in public markets. He has held board positions at companies including KCR Residential REIT PLC, Eight Capital Partners PLC and Limitless Earth PLC, as well as at international investment institutions such as Security Capital European and Henderson Global Investors.

The addressable market - Europe only

Investment summary

Supply@ME is a fintech company addressing an under-served segment of the supply chain financing (SCF) market - inventory monetisation. The Supply@ME platform allows companies to enter into a sale and simultaneous commercial agreement (comprising specific mandates to sell) of inventory held on their own premises, reducing their days of inventory held and freeing up vital working capital.

The types of companies that can benefit from the Supply@ME offering can be found across a wide range of industry groups, including wholesalers, food production and general industrials.

The product offering is not designed as a quick-cash solution for companies with urgent financing needs; rather, it is a tool to be used as a structural element of company balance sheet management.

Supply@ME does not substantially advance funds to companies using its own balance sheet. Rather, the Supply@ME model enables the creation of securitisation notes (asset-backed instruments) to be sold to third party investors, although Supply@ME does maintain a degree of capital input into the structure.

The market opportunity for Supply@ME is vast, initially addressing the European market. This is a large market with a well-developed existing technology infrastructure such as real-time electronic inventory tracking, but still an under- developed SCF market.

The following charts illustrate the scale of the European SCF need.

Big revenue uplift anticipated in 2021 and 2022

Three key differentiators of the Supply@ME business model

Inventory ties up a large amount of working capital for many businesses

It should be clarified that investors in Supply@ME Capital PLC shares are not buying the issued notes, or gaining direct exposure to them. The notes are a separate investment instrument, with Supply@ME generating fee income on the issuance of these notes.

In addition to its inventory monetisation programme, Supply@ME has also announced a second revenue stream through the acquisition of TradeFlow Capital, which completed 6 July 6, 2021. This is a Singapore based inventory financing company that provides funding - via a non-credit approach - for commodity trades 'in transit', with a focus on small and medium-sized enterprises. The deal provides the enlarged Supply@ME group with an additional revenue stream, and will also provide Supply@ME with an enlarged footprint in terms of both funding background, sources and customer origination.

Based on the intended schedule of issuance, and the additional revenue from TradeFlow, we believe that Supply@ME will realise a substantial uplift in revenues during the remainder of 2021. Successful delivery on the current pipeline should help to attract additional corporate clients in our view, and we expect revenue growth to therefore continue in 2022-2023. This revenue carries a strong gross margin for Supply@ME, leading to a rapid transition to positive profitability in our forecasts.

The following chart shows our forecasts for revenue and profit for 2020-2023.

Supply@ME growth outlook

60

Source: Proactive Research

In summary, we argue that the Supply@ME business model has a number of compelling attractions for investors:

• Addresses a large and under-served market
• A unique and rapidly scalable product and, accordingly, technology platform
• A business model based on fee income rather than on use of Supply@ME's own balance sheet

The need

Working capital management is a big issue for companies across a wide range of industry sectors. In particular, companies can often have a lot of capital tied up in inventory. The following are typical figures for days inventory held by different industry groups according to Supply Chain Digest:

• Aerospace and defence - 47 days
• Speciality chemical - 40 days
• Food retail and wholesale - 23 days
• Diversified industrials - 42 days

Inventory funding is the underserved segment of the working capital cycle

Supply@ME connects funders with companies wishing to release working capital

So, for example, a general retailer could have 1/6 (62/365) of a year's worth of sales tied up in inventory.

The following schematic illustrates inventory within the context of the whole working capital cycle.

Working capital financing

Source: Supply@ME

What Supply@ME provides is a monetisation solution for the inventory end of the working capital cycle, allowing businesses to reduce their "days inventory held" metric, and therefore to free up balance sheet resources to be deployed elsewhere in their business.

The solution

The following schematic illustrates how the Supply@ME inventory monetisation solution connects companies with funders.

The Supply@ME business model

Open market funding to be achieved through the issuance of securitisation notes

The Shariah funding capability enhances Supply@ME's access to the MENA region and other markets

Terms agreed for the captive bank investment strategy

• The client company holds inventories of a tangible value, with a known customer base. The client company wishes to free up working capital;
• Supply@ME, via its funding framework, forms a special purpose vehicle called a stock company. This entity buys the inventory, leaving it physically located on the client company's premises. The purchase is financed by the issue of notes as an asset-backed investment instrument; then
• The funders buy the notes. They will receive an interest payment, and receive their principal back when the inventory is sold to its end customer.

The funders can be any number of entities seeking well-balanced risk/ reward asset-backed fixed income investments. These are the following main channels currently being developed for commercial activity in 2021:

Open market funding

Supply@ME has engaged the services of StormHarbour Securities LLP to undertake placings of the asset-backed notes into the open market. We believe that this will become a major avenue of funding during 2021, with activities expected to accelerate once the other two channels (below) have been used to initialise funding activity.

In this regard, during 2020 Supply@ME announced that it would collaborate with a single institution that would exclusively subscribe to the first issuance under the open market funding programme. The institution is a global alternative investment fund with a diversified investment portfolio valued at more than US $70bn. We expect the institution to be named in the coming months once the terms of the first tranche are contractually agreed.

The open market funding includes also the Shariah version of the platform. The Shariah platform was launched in partnership with iMass Investments and with a European bank that specialises in Shariah funding, and the platform has been approved by the Shariah scholar board. This platform greatly expands Supply@Me's reach within the Middle East-North Africa (MENA) region.

Captive funding

In September 2020 Supply@ME announced that it had entered into a strategic agreement with the AvantGarde Group (its current main shareholder) and Quadrivio Group (a European private equity asset manager), to support the acquisition of a bank as a captive source of funding.

On 29 June 2021 Supply@ME announced that following discussions between the parties to secure further progress towards the first inventory monetisation transaction and shareholder value creation, the "Captive Funding" strategy had been updated to include the possibility of a direct investment into a fintech bank owned by an Italian banking group (the "Fintech Bank").

Following this update to the captive bank strategy, Supply@ME has entered into a term sheet with an Italian banking group to acquire 10% of the capital of a fintech licensed bank, with the option to acquire an additional 10% within the following two years. This direct investment will be aimed at having both a multi-annual funding plan and a client company origination alliance and will allow Supply@ME to start immediately arranging the first inventory monetisation transactions in Italy. Details of this deal are were announced on 29 June 2021.

Self funding

In 2020 Supply@ME announced that it had been working with two banks to set up self-funding agreements (whereby the bank originates customers and funds directly the asset backed notes).

It is the opinion of the company that the modification of strategy related to the captive funding route will support the development of such alliances.