Tanfield Regulatory News (TAN)

The Tanfield Group Plc

("Tanfield" or "the Company")

Final Results for the year ending 31 December 2014

Tanfield Group Plc, a "passive" investment company as defined by AIM Rules, announces its final results for the year ending 31 December 2014. The audited financial statements will be posted to shareholders before the end of the month. A further announcement will be made at this time as well as making them available on the Company website at www.tanfieldgroup.com.

Jon Pither, Chairman of Tanfield, said:

"During the year both of the investments made progress which the Board feels brings the realisation of value a step closer. The current combined value per share of investments is 33p 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. The business continued to make steady progress through 2014 in a number of key areas. Production during 2014 increased from recent years and the business took advantage of the general uplift in the market for its products. Following a significant level of working capital invested into the Snorkel business since its disposal, currently in excess of $45 million, supplier constraints have reduced, allowing both production and the spares business to improve. This has resulted in Snorkel being able to more effectively support its machines in the field. As a result the order book rose to higher levels than when the business was disposed of. Ahern Rental, a related company through ownership of Snorkel, has absorbed the full costs of certain Snorkel assembly and distribution centres as well as consolidating a number of functions onto one site. This strategic restructuring has had the benefit of extending Ahern's reach whilst maintaining Snorkel distribution at a reduced cost, lowering the breakeven level of turnover of the business. The Snorkel business is going through a process of redesigning its catalogue of equipment with a view to increasing the commonality of parts, reducing build cost and improving functionality for the end user. Snorkel is competing for an increasing market share in a very aggressive environment. Its product development program together with cost and price reductions positions Snorkel in this highly competitive market.

Snorkel is targeting to turn over about $150m in 2015. As expected and indicated in previous announcements the business made a loss through the winter. In the early part of this year the turnover of the business was cycling, on average, at approximately $9 million per month. It is understood that the break even of the business is between $10 and $11 million per month, depending upon the mix of products sold. Through the winter months the order book in Europe was, as expected, relatively flat, although better than in previous years. The European order book has subsequently lifted, although still being impacted by the continuing need to re-establish the Snorkel brand after the severe downturn in the market over the previous five years. The order book in the U.S. supported by orders from Ahern Rentals is much stronger. The sales teams both in Europe and USA have been substantially increased. The Board of Tanfield recognises that Mr Don Ahern, the owner of Extreme and Ahern Rentals has continued to make positive statements about Snorkel in trade magazine articles and has firmly established his commitment to the business by the level of the investment in working capital and in new product development of $50 million.

Valuation of Snorkel holding

The Board of Tanfield has taken a view of the carrying value of its 49% holding and its preferred interest holding (Loan note) that takes account of risks in the industrial global markets and the normal cycles that operate within these markets. The range of potential valuation can be broad. The valuation has, to an extent, a time driven element. The agreement for the valuation formula to be triggered is over a five year period. At the end of 2014 there were four years left to run on this aspect of the agreement. If the formula is not triggered within the 5 year time frame Tanfield will still retain 49% of the equity. The decision has been made to maintain its valuation of £36.3m ($60.1m). This valuation has been assessed against a number of criteria using discounted cash flow in relation to the sale and purchase agreement and its valuation formula:

• Level of investment in working capital.

• Capital investment.

• Production capacity.

• Order Book.

• Market conditions.

• Historical capability of the business to ramp up output.

The valuation has not been adjusted for foreign currency fluctuations due to the uncertain nature of future foreign currency markets. Based on the exchange rate at 31 December 2014, the $60.1m valuation would convert to £38.5m and based on the exchange rate at 1 June 2015, it would convert to £39.5m. This represents approximately 27p per share.

Smith

In October 2013 Smith completed a restructuring exercise that saw it convert debt to equity. As a result of this, the Company's equity shareholding went from 24% to 5.76% (excluding warrants).

During the year Smith continued to pursue a business strategy of combined manufacturing and licensing of its technology and has made significant progress towards this goal since the year end. In May 2015 it executed a conditional agreement to form an exclusive joint venture ("the JV") with strategic partner and investor FDG Electric Vehicles Limited ("FDG"). FDG is an international company listed on the Hong Kong Stock Exchange and is a vertically integrated electric vehicle manufacturer engaged in the R&D, production and distribution of all-electric vehicles. Under the terms of the JV, Smith will invest the Smith brand, licence for Newton™ EV design and IP while FDG will invest $15M in cash and $30m in assets, licence for commercial EV design and IP. The New Joint Venture entity will be responsible for US product development, sales and marketing and Smith will be responsible for manufacturing and maintain its right to territories outside of the USA. The agreement is conditional on certain conditions precedent including , inter-alia, necessary government approvals and FDG due diligence.

Smith will hold 20 million shares out of a total of 42.5 million which represents a holding of 47%. Under the terms of the JV agreement Smith will distribute all the shares in the JV to its common stockholders on a pro rata basis, of which Tanfield currently hold 5.76%. The Board views these developments as positive and believes the joint forces of Smith and FDG and the combined investment in EV technology presents significant opportunities in a developing EV market.

The Smith Board is still following a strategy of a public listing. On the completion of the merger with ABSR leading to a listing on the OTC, Smith intends to apply for a Listing on a US national exchange. Subject to meeting the applicable listing requirements, it is proposed that Smith will apply to list on NYSE or NASDAQ upon completion of a subsequent underwritten offering of $40 million of which FDG is contractually committed to providing $30 million. This is in order to satisfy the waiver of the one year seasoning requirement, a regulation relating primarily to applicant companies that have previously been traded on another exchange, and the reporting of information.

Valuation of Smith holding

Based on the most recent valuation where Smith have raised funds, the Company's 5.76% holding would be valued at £7.0m ($10.7m). The Board also believes, based on the valuation of the JV that has been agreed between the JV parties in contributing their respective assets, subject to the JV agreement completing, that this will represent approximately £1.5m ($2.3m) of value to Tanfield giving a combined valuation of approximately £8.5m ($13.0m). This could represent approximately 6p per share.

Despite Smith recently raising funds based on the valuation above, there remains no active market in these shares and the disposal of Tanfield's shares at those values is not possible at this time. Therefore, the Board is of the opinion that it is correct to continue to value the investment at cost. The realisation value may be higher than its carrying value but because of the uncertainty attached the Board feels it is correct to maintain this position. As a result of the debt conversion, this sees the balance sheet carrying value increase from £1.3m ($2.0m) at 31 December 2013 to £4.8m ($7.4m) at 31 December 2014.

It has been agreed by Smith Board that all the warrants granted to Tanfield are now exercisable at a maximum price of $0.31 cents. It is understood from Smith that it still intends to pursue a listing on a US stock exchange.

Strategy of Tanfield Board of Directors in relation to its Investments

Although the Board cannot predict the timeframe for the return of value in its investments, the Directors believe that its two investments will result in a return of value to shareholders over time. The strategy of the Company in relation to these investments is to return as much as possible of the realised value to shareholders as the 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 progress made by both Snorkel and Smith, there is still a risk of failure. The Board will continue to fulfil its obligation to its shareholders in seeking to optimise the value on its investments. 

The Investments are defined as passive investments and inline 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.

a The company's special reserve relates to the reclassification of the share premium account.

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 Group for the year ended 31 December 2014.

The information in this  statement has been extracted from the accounts for the year ended 31 December 2014 and as such, does not contain all the information required to be disclosed in accordance with the International financing reports standards ("IFRS").

The financial statements for the year ended 31 December 2014 reflect the changes to the principal activity of the company to that of an investment company and the comparatives have been restated on the same basis. 

2. Audited Financial Statements

The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 December 2014 or 2013 within the meaning of s435 of the Companies Act 2006 but is derived from those accounts. Statutory accounts for 2013 have been delivered to the registrar of companies, and those for 2014 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006 in respect of the accounts for 2013 or 2014. The results for the year ended 31 December 2014 were approved and authorised for issue by the Board of Directors on 19 June 2015 and are audited.

The information contained in this preliminary announcement has been approved by the Board of Directors

3. Earnings per share

Basic earnings per share is calculated by dividing the profit 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. The average share price during the year was 16.90p (2013: 20.25p).