Wednesday 20 February 2013

Tanfield (TAN) ... woefully risible

I rang up ETX and sold a small amount short in Tanfield (TAN, mkt cap £26m) at 20p/shr. The borrow is limited, otherwise I would do more. The prospects for this company appear hopeless. A cursory glance at the accounts infer that since 2007, the company has burnt through c. £76m in free cash flow. I assume that it has burnt c. £10m this year alone in free cash flow. Therefore the company has chalked up an average burn rate of £12.7m pa during the period 2007-12. Further, shareholders' equity has declined from £165m in 2007, to £30m in 2011. Talk about destruction of shareholder value. 

Trading wise, the company's update this morning was both woeful and risible. FY 2012 revenue is likely to be flat, while losses are expected to be similar to H1, i.e. a FY loss of c. £14m. However, the group  is banking on achieving its first full year of profit in 2013, since 2007. It is my understanding that its revenue would be required to almost double to achieve break-even. Somehow I do not see that happening. 

The update also contained some witterings about Tanfield receiving bid approaches. Given the history of cash burn in the business, I would expect it is more likely that Tanfield approached others to rescue it. Either way, I do not expect any bid to materialise at a premium to the share price. 

And another thing ...
Tanfield's house broker, WHIreland, in its morning commentary suggested ...

"Thus in the absence of a bid, in our view the balance sheet requires additional funds (at present the balance sheet is ungeared and working cap facilities have now been secured) in order to benefit from the continuing market upturn for AWP equipment (this evidenced by peers)."

I read that to be pretty clear that a potential fund-raising could be imminent. I expect at least £8m would be necessary. In the light of the destruction of shareholder equity over the last six years and considerable cash burn, I doubt any bank would oblige. That means shareholders are likely to have to step up. I reckon 10p will be the going rate, which would be quite some dilution. 

Tanfield share price
Source: Bloomberg
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