The Tanfield Group Plc
("Tanfield" or "the Company")
Final Results for the year ending 31 December 2016 and Notice of AGM
Tanfield Group Plc, a passive investing company as defined by AIM Rules, announces its final results for the year ending 31 December 2016. The audited financial statements are being posted to shareholders today and made available on the Company website at www.tanfieldgroup.com shortly.
Tanfield announces that its Annual General Meeting will be held at 11:30 a.m. (UK time) on 7 August 2017 at Sandgate House, 102 Quayside, Newcastle-upon-Tyne, NE1 3DX. Information on the resolutions can be found in the Notice of Annual General Meeting circular that will be posted to shareholders today and made available on the Company website at www.tanfieldgroup.com shortly.
Daryn Robinson, Chairman of Tanfield, said:
"During the year we have continued to monitor closely the progress of both of the Company's investments. The Board once again feels that some progress has been made towards a realisation of value in the investment in Snorkel following further growth in 2016. The calculation of the Snorkel valuation was made in 2013 and is based on the formula detailed in the circular that was distributed prior to the disposal of the controlling interest in Snorkel, which expires on 30 September 2018. There is no guarantee that the financial targets required to trigger the realisation of this value will be met before the expiry date. The Board is of the opinion that should the financial targets not be met before the deadline, the current valuation could be a fair reflection of the investment value beyond the end of the 5 year period. With respect to Smith, however, the Board continue to hold the view that the value of the investment should be nil. The current combined value per share of investments is 23p per share."
Investment Report
Background
The Company is defined as an investment company with two passive investments. This definition resulted from the disposal of Smith Electric Vehicles in 2009 and the disposal of Snorkel in October 2013. Tanfield Group Plc currently owns 5.76% of Smith Electric Vehicles Corp. ("Smith") and 49% of Snorkel International Holdings LLC ("Snorkel").
Overview
Snorkel
Tanfield continues to own 49% of Snorkel, which it has held since the disposal of the business in October 2013. Sales levels (unaudited) have continued to grow during 2016, increasing by 19% to $130.5m (2015: $109.9m / 2014: $85.3m). Despite market conditions continuing to be challenging, Snorkel has been able to achieve improved market share in targeted regions allowing it to also create a broader and more diverse customer base. This is expected to help underpin further growth expected for 2017, including from large rental companies that have not purchased Snorkel product for a number of years. This is testament to the progress Snorkel has made in recent years and the improvements to the product range, build quality and customer service.
The Snorkel 2016 accounts report an operating loss (unaudited), excluding depreciation, of $2.8m (2015: $10.6m / 2014: $14.9m) with $1.9m of this loss being incurred in the first quarter of the year and the business operationally breaking even during some of the later periods. The significantly reduced operating loss is partially linked to the increased sales levels but is mainly the result of the focused cost-down activity that has taken place during 2015 and 2016 coming to fruition, thereby reducing the bill of material costs and lowering the break-even sales point.
Despite the challenging trading conditions, the Board understand Snorkel is again targeting double-digit growth in 2017 from their UK manufacturing facility which mainly provides product to the European marketplace. Tanfield are, however, unsure how much growth will come from the US manufacturing facility in 2017, given its dependency upon Ahern Rentals as its principal customer. Nevertheless, as a result of the success of the cost down activity and the double digit European growth expectation, the Board believes Snorkel could still achieve combined growth, as evidenced in the March 2017 quarterly accounts, and move into profit for the full 2017 year, in line with their forecast.
Should economic conditions materially change in the latter stages of 2017, this may have an impact on the expected outcome, but the Tanfield Board is currently of the opinion that the investment in Snorkel will result in a return to shareholders in the future, although it should be noted that this may not materialise until after 30 September 2018 when the outcome then becomes uncertain and could be more or could be less than the calculated realisation value.
Valuation of Snorkel holding
The Board of Tanfield has taken a view of the carrying value of its 49% holding and its preferred interest position that takes account of risks in the industrial global markets and the normal cycles that operate within these markets. The range of potential valuations can be broad, with the added complexity of a time- driven element whereby the agreement for the current valuation formula could only be triggered during a five year period ending in September 2018. The transaction is described below, largely extracted from page 7 of the Circular distributed to Shareholders in 2013 and available from the Company website at http://www.tanfieldgroup.com with current values* inserted where appropriate.
Xtreme, by way of its holding in SKL Holdings, entered in to a staged acquisition of the Snorkel Division, via the creation of Snorkel International Holdings, in which Tanfield retains a holding until the consideration terms are fully met. Xtreme has made significant working capital facilities available to Snorkel International Holdings to deliver its growth forecast (currently believed to be approximately $70m* of working capital) and has delivered certain other strategic benefits and synergies to Snorkel International Holdings. Tanfield retains an initial interest in 49% of Snorkel International Holdings and an adjusted preferred interest position of $22.4m*, in exchange for Xtreme's controlling interest in Snorkel International Holdings. Subject to the Snorkel Division reaching an EBITDA of at least $25m for any prior 12 month period prior to 30 September 2018, Tanfield can demand payment of this preferred interest which would be paid when Snorkel International Holdings is able to fund such payment and its net debt/EBITDA ratio is less than 2, ultimately reducing Tanfield's interest to 30% and Xtreme will hold 70% of Snorkel International Holdings.
Subject to the payment of the preferred interest, and before 30 September 2018, Tanfield has a ''put'' option on this remaining holding, whereby SKL Holdings will be obliged to purchase the remaining interest held by Tanfield at an agreed multiple of 5.5 times EBITDA earnings, as at the date of the put, again subject to Snorkel International Holdings being able to fund such a payment. SKL Holdings has a call option on the same commercial terms.
At the end of 2016 there were just under two years left to run on the fixed terms of the agreement. If the formula is not triggered within the 5 year time frame Tanfield will retain a 49% interest in Snorkel but the $25m EBITDA trigger compelling payment of the $22.4m adjusted preferred interest position and the Company's put option compelling the purchase of Tanfield's remaining interest in Snorkel will expire.
The Board continues to have discussions with Snorkel and remain of the view that Don Ahern, the owner of Xtreme, would wish to one day own 100% of Snorkel and will therefore seek to buy Tanfield's holding in Snorkel at some point in the future.
The Board has considered a number of scenarios and, based on the range of possible outcomes, feel the valuation of £36.3m should be maintained. This valuation has been assessed against various criteria, including past performance, production capacity, market conditions, the capability of the business to increase output and exchange rate fluctuations.
The original valuation was based on the assumption that the $25m EBITDA target would be reached within the 5 year period. Whilst that target now seems increasingly unlikely to be achieved, if the assumption is made that both the progress within Snorkel and the wider global market conditions will continue to improve, then the current £36.3m valuation could still be a fair reflection of the investment value beyond the 5 year period; with the caveat that a number of factors could influence the valuation and performance of Snorkel between now and a potential realisation date beyond September 2018, including Xtreme's negotiating stance. Therefore, the actual value that might be realised could be more or less than the current valuation.
The Board would like to draw your attention to note 2 of this announcement and that the auditors have also highlighted this uncertainty.
The Board will continue to monitor the investment and is reviewing the original agreements with its advisers to ensure it has an accurate understanding of the position post September 2018 should the EBITDA target not be achieved beforehand.
Smith
In October 2014 Smith completed a restructuring exercise that saw it convert debt to equity. As a result of this, they informed the Company that its equity shareholding had reduced from 24% to 5.76% (excluding warrants).
Since then, Smith has sought to raise funds which would allow it to implement its strategic plan. To date, no significant fundraise has been completed and the Board of Tanfield does not foresee this happening in the immediate future.
In May 2015 Smith executed a conditional agreement to form an exclusive joint venture with strategic partner and investor FDG Electric Vehicles Limited ("FDG"). In May 2016, the Board of Tanfield was informed that Smith had filed a complaint against FDG and the New Joint Venture. The Board of Tanfield understands that counter-claims have been made against Smith and that legal procedures are ongoing.
Valuation of Smith holding
In 2015, the Board of Directors carried out a review of the investment in Smith resulting in a decision to impair the investment value to nil. The Board came to this decision due to funding uncertainties as well as the legal proceedings between Smith and FDG.
We understand that legal proceedings are ongoing and that Smith have not been able to raise any meaningful funds since that time and so the Board maintain its opinion that the investment value should be held at nil.
Strategy of Tanfield Board of Directors in relation to its Investments
Although the Board cannot predict the timeframe for a return of value in its investment in Snorkel, the Directors believe that it will result in a return of value to shareholders over time. In contrast, at this stage it does not look likely that its investment in Smith will result in a return of value to shareholders.
The Directors will update shareholders should this view change.
The strategy of the Company in relation to these investments is to return as much as possible of any realised value to shareholders as events occur and circumstances allow, subject to compliance with any legal requirements associated with such distributions.
The Board takes the view that while there has been further progress made by Snorkel, there is still a risk of failure, although based on progress to date and commitments from Don Ahern / Xtreme, this seems unlikely. The Board will continue to fulfill its obligation to its shareholders in seeking to optimise the value of its investments.
The Investments are defined as passive investments and in line with this definition Tanfield does not hold Board seats in either Snorkel or Smith. There is no limit on the amount of time the existing Investments may be held by the Company.
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STATEMENT OF COMPREHENSIVE INCOME |
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FOR THE YEAR ENDED 31 DECEMBER 2016 |
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2016 |
2015 |
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£000's |
£000's |
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Revenue |
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- |
- |
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Staff costs |
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(85) |
618 |
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Other operating income |
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30 |
27 |
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Other operating expenses |
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(182) |
(268) |
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(Loss)/Profit from operations before impairments |
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(237) |
377 |
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Impairment of Investments |
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- |
(4,770) |
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Loss from operations after impairments |
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(237) |
(4,393) |
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Finance expense |
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(13) |
(54) |
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Finance income |
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1 |
1 |
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Net finance expense |
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(12) |
(53) |
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Loss from operations before tax |
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(249) |
(4,446) |
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Taxation |
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- |
- |
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Loss & total comprehensive income for the year attributable to equity shareholders |
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(249) |
(4,446) |
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Earnings per share
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Loss per share from operations |
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Basic (p) |
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(0.2) |
(3.1) |
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Diluted (p) |
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(0.2) |
(3.1) |
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BALANCE SHEET (Company registration number 04061965) |
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AS AT 31 DECEMBER 2016 |
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2016 |
2015 |
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£000's |
£000's |
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Non current assets |
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Non current Investments |
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36,283 |
36,283 |
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36,283 |
36,283 |
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Current assets |
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Trade and other receivables |
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61 |
98 |
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Cash and cash equivalents |
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269 |
94 |
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330 |
192 |
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Total assets |
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36,613 |
36,475 |
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Current liabilities |
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Trade and other payables |
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91 |
110 |
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91 |
110 |
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Non-current liabilities |
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Other payables |
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- |
254 |
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- |
254 |
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Total liabilities |
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91 |
364 |
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Equity |
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Share capital |
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7,816 |
7,546 |
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Share premium |
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17,190 |
16,800 |
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Share option reserve |
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459 |
461 |
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Special reserve |
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66,837 |
66,837 |
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Merger reserve |
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1,534 |
1,534 |
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Retained earnings |
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(57,314) |
(57,067) |
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Total equity attributable to equity shareholders |
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36,522 |
36,111 |
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Total equity and liabilities |
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36,613 |
36,475 |
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STATEMENT OF CHANGES IN EQUITY ATTRIBUTABLE TO EQUITY SHAREHOLDERS |
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FOR THE YEAR ENDED 31 DECEMBER 2016 |
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a The company's special reserve relates to a previous reclassification of the share premium account.
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CASH FLOW STATEMENT |
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FOR THE YEAR ENDED 31 DECEMBER 2016 |
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2016 |
2015 |
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£000's |
£000's |
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Loss before interest and taxation |
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(237) |
(4,393) |
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Loss on impairment of investments |
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- |
4,770 |
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Operating cash flows before movements in working capital |
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(237) |
377 |
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Decrease/(increase) in receivables |
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25 |
(25) |
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Decrease in payables |
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(273) |
(1,331) |
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Net cash from/(used in) operations |
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(485) |
(979) |
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Cash flow from financing activities |
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Proceeds from issuance of ordinary shares net of costs |
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660 |
704 |
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Net cash from financing activities |
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660 |
704 |
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Net decrease in cash and cash equivalents |
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175 |
(275) |
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Cash and cash equivalents at the start of year |
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94 |
369 |
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Cash and cash equivalents at the end of the year |
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269 |
94 |
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1. Basis of preparation
The results announcement has been prepared under the historical cost convention on a going concern basis and in accordance with the recognition and measurement principles of International Financial Reporting Standards and IFRIC interpretations as adopted by the EU ("IFRS").
The announcement has been prepared on the basis of the same accounting policies as published in the audited financial statements of the Company for the year ended 31 December 2016.
The information in this statement has been extracted from the accounts for the year ended 31 December 2016 and as such, does not contain all the information required to be disclosed in accordance with the International financing reports standards ("IFRS").
2. Audited Financial Statements
The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2016 or 2015 within the meaning of s435 of the Companies Act 2006 but is derived from those accounts. Statutory accounts for 2015 have been delivered to the registrar of companies, and those for 2016 will be delivered in due course.
The auditors have reported on those accounts; their reports were (i) unqualified and (ii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006 in respect of the accounts for 2015 or 2016. However, (iii) in their audit report for the year ended 31 December 2016 the auditors did draw attention by way of an emphasis of matter to a material uncertainty that could impact the carrying value of Non Current Asset Investments (no emphasis was referenced in 2015). Further details can be found in the auditors report on page 11 of the Company's statutory accounts for the year ended 31 December 2016. The results for the year ended 31 December 2016 were approved and authorised for issue by the Board of Directors on 29 June 2017 and are audited.
The information contained in this preliminary announcement was authorised and approved by the Board of Directors on 29 June 2017.
3. Loss per share
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Basic loss per share is calculated by dividing the loss attributable to equity shareholders by the weighted average number of shares in issue during the period. In calculating the dilution per share, share options outstanding and other potential ordinary shares have been taken into account where the impact of these is dilutive. As the potential dilutive ordinary shares from share options reduce the loss per share these shares are omitted from the dilutive loss per share calculation. The average share price during the year was 12.88p (2015: 19.58p). |
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Number of shares |
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2016 |
2015 |
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No. |
No. |
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000's |
000's |
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Weighted average number of ordinary shares for the purposes of basic earnings per share |
153,677 |
144,823 |
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Effect of dilutive potential ordinary shares from share options |
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122 |
171 |
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Weighted average number of ordinary shares for the purposes of diluted earnings per share |
153,799 |
144,994 |
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Loss |
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2016 |
2015 |
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From operations |
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£000's |
£000's |
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Loss for the purposes of basic earnings per share being net profit attributable to owners of the parent |
(249) |
(4,446) |
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Potential dilutive ordinary shares from share options |
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- |
- |
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Loss for the purposes of diluted earnings per share |
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(249) |
(4,446) |
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Loss per share from operations |
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Basic (p) |
|
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(0.2) |
(3.1) |
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Diluted (p) |
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(0.2) |
(3.1) |
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For further information:
Tanfield Group Plc
Daryn Robinson 0700 349 7489
WH Ireland Limited - Nominated Advisor
James Joyce / Alex Bond 020 7220 1666
Peterhouse Corporate Finance - Broker
Peter Greensmith / Duncan Vasey 020 7220 9797