The Tanfield Group Plc

("Tanfield" or "the Company")

 

Final Results for the year ending 31 December 2017 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 2017. 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 12:00p.m. (UK time) on 21 May 2018 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:

 

"We have continued to closely monitor the progress of the Company's main investment in Snorkel International Holdings LLC ("Snorkel") during the year whilst still maintaining a watchful eye over the investment in Smith Electric Vehicles Corp. ("Smith") despite the carrying value being nil. The Board is pleased with the progress made by Snorkel during 2017 and feels that, should the progress continue, it makes the likelihood of a realisation of value in the future more probable. The calculation of the Snorkel valuation was made in 2013 and is based on the formula for realisation of value, which expires on 30 September 2018, detailed in the circular that was distributed prior to the joint venture between Tanfield Group Plc and Xtreme Manufacturing LLC. Whilst progress continues to be made, the Board is of the view that the financial targets required to trigger the formula for realisation of value will not be met before this expiry date. After this date, the calculation of the investment value becomes uncertain and the return could be less than the carrying value. The Board continues to hold the view that the value of the investment in Smith should be nil."

 

Investment Report

 

Background

 

The Company is defined as an investment company with two passive investments. This definition resulted from the disposal of the controlling interest in Smith in 2009 and the formation of a joint venture between Tanfield Group Plc and Xtreme Manufacturing LLC ("Xtreme") relating to Snorkel in October 2013.  Tanfield currently owns 5.76% of Smith Electric Vehicles Corp. and 49% of Snorkel International Holdings LLC.

 

Overview

 

Snorkel

Tanfield continues to own 49% of Snorkel, which it has held since the joint venture was established in October 2013. Sales levels (unaudited) have continued to grow during 2017, increasing by 27% resulting in sales of $165.8m (2016: $130.5m / 2015: $109.9m / 2014: $85.3m). Snorkel's strategy of creating a broader and more diverse customer base in targeted areas is one of the factors that has assisted the continued sales growth. The Board is not aware of any market factors, nor has it been made aware of any other specific reason why further growth could not take place in 2018.

 

The Snorkel unaudited accounts for 2017 report an operating profit, excluding depreciation, of $1.6m (2016: $2.8m loss / 2015: $10.6m loss / 2014: $14.9m loss). The Board takes comfort from a sustained period of operating profitability experienced in 2017. This is testament to the focused cost-down activity that has taken place in recent years and that is expected to continue in future and which, if successful, should reduce the bill of material costs and improve gross margins further. 

 

With the continued focus and support received from the majority owner Don Ahern, the owner of Xtreme, the Board sees no reason why Snorkel could not once again see growth in 2018, having achieved sales growth of 29% in 2015, 19% in 2016 and 27% in 2017, and therefore potentially increase the level of operating profitability. Tanfield is, however, unsure if the dependency in the US upon Ahern Rentals as its principal customer may have an impact upon this possible outcome.

 

Should economic conditions materially change during the remainder of 2018, this may have an impact on the expected outcome, but the 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 is not expected to materialise until after 30 September 2018, when the outcome then becomes uncertain and could be less or could be more 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 adjusted priority amount 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.

 

At the end of 2017 there were just 9 months 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 trailing 12 month $25m EBITDA trigger compelling payment of the $22.4m adjusted priority amount and the Company's put option compelling the purchase of Tanfield's remaining interest in Snorkel will expire. The Board continues to hold the view that Don Ahern, the owner of Xtreme, would wish to one day own 100% of Snorkel and will therefore seek to exercise the call option to buy Tanfield's holding in Snorkel at some point in the future.

 

As the Board is of the view that the $25m EBITDA trigger will not be achieved by the expiry date, the calculation of the investment value then becomes uncertain. The Board has considered a number of possible scenarios, which assume that both progress within Snorkel and the wider global market conditions will continue to improve and, given the range of possible outcomes, the actual realisation could be less or more than the current valuation. 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 and the exchange rate at the time of any realisation.

 

Due to the inherent uncertainties, the Board is unable to determine whether the outcome will be less than the current investment value so feel the current 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.

 

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 proceedings 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 the funding uncertainties as well as the legal proceedings between Smith and FDG.

 

In the light of the ongoing legal proceedings and Smith's inability to raise any meaningful funds since that time, the Board maintains 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 from 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.