Tanfield - will they give your portfolio a lift ?

This AIM listed engineering group of companies is based in Washington,  Country of Durham. With the shares standing at 34p each (29.10.09) and close on 72m issued ordinary shares, it has a market capitalisation of £25.2m. These bald facts only begin to tell a story which has become something of a business school case study.

A little over two years ago (23 July 2007), TAN’s ordinary shares were trading at £10 per share to descend just over a year later (September 2008) to 6p per share.  Matters are clouded by the rights issue mentioned below which played a part in this price adjustment. In share price terms, the last fourteen months have been relatively tranquil – up to 85p and now nudging along in the mid thirties.

What happened? Well, firstly the business turbulence is ongoing (see below) and, if everyone had time to catch breath, then the business text-books  might be in course of preparation. Still, a condensed version of the turbulent events is set out below:

Current Profile and Prospects

Tanfield Group now has two main divisions:

Powered Access was the origin of TAN and still accounts for some 75% of group turnover. It contains two of the world’s most well known global brands in aerial work platforms, Upright Powered Access and Snorkel International. The worldwide market for this division is very dependent on the construction industry and this continues to be a source of weakness.

Snorkel was acquired in August 2007 for £50m, a price which on close examination of Snorkel’s balance sheet was subsequently found to be excessive and mostly written off during the following year’s accounts.

The shareholders who contributed 163p per share in the  June 2007 rights issue, raising a total of £115m,  to pay for this acquisition and pay down other group debt must have felt very sore when all that unfolded. Even this share issue was clouded as shortly afterwards some 8.5m of Roy Stanley’s shares were sold at 163p to reduce his holding. [2]

Tanfield now have a very significant presence, throughout Europe, Middle East and Africa in addition to the USA in the powered access market which globally is worth over $1bn p.a. [ref] www.londonstockexchange.com [/ref]

Zero Emission Vehicles is the area occupied by Smith Electric Vehicles – founded in 1920 and acquired by TAN in October 2004. Most of the older generation remember Smith’s from the days of trolley buses and electrically powered milk and bakers floats. For younger investors, the image of electrically powered vehicles is tarnished by the Sinclair C5. As fashions have a habit of doing, their time has come again and battery operated vehicles are now right at the frontier of the coming low carbon usage, climate change debate and are exempt from urban congestion charges. This division accounts for just short of 20% of TAN’s group turnover but it is expected to grow very quickly over the next two/three years. [ref] http://www.tanfieldgroup.com [/ref]

The remainder of TAN’s business (5%) is comprised of a division engaged in the design and manufacture of engineering parts.

As for prospects, the bets are on electric vehicles, their time is close if not already here. As an example Tanfield have linked with Ford to produce the Edison an electrically powered Transit type carrier and how things have moved on: more range (approximately 100 miles) and no longer does the battery pack mass take up a proportion of the loading floor. In fact the Edison has parity with the Transit for carrying capacity.

Orders for the Edison have begun to flow:  BT, Sainsburys (for deliveries to internet shoppers) and TNT (for in town use). The last five years have seen huge technical strides and this is fully expected to continue, indeed Tanfield with its wide geographic links, is close to being the world leader in the development of electrically powered vehicles.

The Troubles

Tanfield’s main driver (forgive the pun) has been Roy Stanley, an ex teacher who entered the engineering business during the 1990s and took over Tanfield in 2003 and developed, with Darren Kell who joined around this time, what is now the powered access division via the acquisition of Upright. They added Smith’s Electric Vehicles in 2004 for £3.2m.

The Company and its share price were seemingly heading forever upwards until they really got carried away with the purchase in 2007 of the American aerial access business for £55m, paying for it with the proceeds of the rights issue on the back of a sky high Tanfield share price. A cardinal error, a smallish company in UK trying to run a company in mid west USA which turned out to be a real bag of nails and a near bottomless pit for  the requirement of operating cash.

Being charitable, Tanfield management were probably unaware of the true state of affairs for the following six to twelve months but compounded this by a series of upbeat statements  and bold expansion plans [ref] http://www.investorschronicle.co.uk/Companies/ByEvent/TradingNews/Inbrief/article/20080701/aa51dc08-4762-11dd-9987-0015171400aa/Tanfield-shares-collapse.jspf [/ref] which eventually wore thin with analysts and the investing community and the shares took a hammering, exacerbated by the severe general slide in the AIM market over the 2008/9 period.

As already mentoned, to add to all the Snorkel operating and book losses, Tanfield wrote of nearly all their initial investment in Snorkel in their accounts to 31 December 2008.

Recent Operating Performance [ref] http://www.tanfieldgroup.com [/ref]

In short, pretty dismal. During the six months to 30 June 2009 when compared to the same period in 1998 group turnover at £29.9m was a third of the £92.8m  previously and inevitably the 2008 operating profit of £10.3m reversed into an operating loss of £11.1m in the six months to 30 June 2009.

Of necessity, the source of the current problems are ‘a direct consequence of the worldwide economic recession’ and it has to be added that if you are relying on your customers purchasing capital goods then you are going to suffer if commercial credit markets dry up and they can’t get access to finance.

Management did what they could with labour/staff costs, down by 40%, but seemed to lose it with control of materials/consumables, which under normal circumstances are broadly proportionate to product revenue. In the six months to 30.06.09, materials were 80.5% of sales, the comparative figure for 2008 was 57.5%.

Current Finances

The balance sheet at 30 June 2009, although so called ‘debt free’  is a little worrying. [ref] http://www.tanfieldgroup.co.uk/AnnualReport2008/AnnualReport2008.html [/ref]

1)      Tanfield has £23.8m of fixed i.e non current assets of which £14.6m is listed as ‘Intangibles’ usually patents or Intellectual Property, which, in any event, cannot be used as collateral for loan funding when the company needs that reource.

2)      The group has £73.6m of current assets of which £10.8m is in cash and £13.1m as trade receivables. That's ok but the issue here is the £49.4m of Inventories, this for a company whose turnover for six months was £29.9m! There would appear to be some heavy write offs and hits to the future profit and loss accounts waiting in the wings here.

3)      Liabilities payable within the next twelve months are listed as £24.9m which just about accounts for the receivables and cash noted above.

The conclusion from all the above is that Tanfield need to be operating profitably very soon to trade their way out of the difficulties the last few years have brought.

Latest forecasts [ref] http://www.investorschronicle.co.uk/ [/ref] are that the full year to 31 December 2009 will show turnover of £65m and for the year to 31 December 2010 revenue of £70m with the profit and loss account showing break even for both years. Unsurprisingly no dividend is forecast for these two years – as has been the case for six years or so since Tanfield arrived on AIM.

Conclusion

According to the recently published interim statement [ref] http://www.tanfieldgroup.com [/ref] , TAN’s directors ‘giving detailed consideration to a possible de-merger of the two core trading divisions’. It is difficult to see the attractions to potential investors of the powered access business as an entity and the electric vehicles segment would probably be too small for a public listing so that would probably be dependent on a private equity deal.

What a de-merger should bring about is a very satisfactory exit for the present TAN shareholders including of course Chairman and ex Chief Executive Roy Stanley with his 27.8m shares (7.2% of issued ordinary shares) and Chief Executive (and previously Commercial Director) Darren Kell, who having sold his previous stake in 2007, bought his current 1.7m shares for an average price of 6.83p conveniently three months ahead of the last year end at 31.12.08. Mr Kell has options on a further 6.3m shares at 20p each.

Whatever the attractions of the present economic conditions for parts of the company, the basic question for those thinking of an equity  investment in TAN right now is - are you prepared to trust your money with and back the same management team who took the company and its shareholders through all the turmoil of the past four years ?

For me, there is just too much ‘history’ with this one. But I welcome comments if you disagree.