Tuesday, 29 April 2008

Business Opportunity – Tanfield Group – Creating the Spark of Interest in Taxis and LCVs

The road to successful ecological commerce isn’t necessarily an easy one, even if we are ‘green-washed’ into believing any venture with eco-exposure is expected to capture the public’s attention and take-off accordingly.

As Tanfield Group and it’s Smith Electric Vehicles division teamed-up with Ford, it undoubtedly hoped that City analysts would look favourably upon the partnership that integrates new generation propulsion with class-leading chassis and bodies. Unfortunately they didn’t, and the reaction to the showcasing of LCV ‘Ampere’ (based on the Transit Connect LCV) and the Faraday Mk2 was unfortunately negative, the important launch news completely out-weighed by under-performing EoY group results, and lack of near to mid-term impetus.

The main problem is the fact that these 2 new vehicles aren’t seen as adding much in the way of firm, immediate value to the Smith’s business.

The Faraday Mk2 will simply replace the vehicles of current clientele, so probably providing little in the way of additional sales, and the Ampere poses (for now) a distinct question-mark since its European and US customers tend to be smaller private businesses, who are understandably conventional in their buying habits due to reliability focus and the need to have secured depreciation charges allocated to the company van(s); well known when a conventional vehicle less so as an electric. In this regard the typical Ampere buyer would be the polar opposite of the big fleets (see below) who can afford to trial a limited number of Smith’s vehicles, particularly the Transit based Edison, given their large fleet size.

Sainsbury’s – Edison (Transit)
Royal Mail – Edison LWB
Southern & Scottish Energy – Edison LWB
CEVA Logistics – Newton 7.5T
TNT – Newton 7.5T
DHL - Newton 9.5T

[Interesting to note that 12 months ago Tesco decided to trial the Modec Electric Van, and continues to evaluate. Its sub 7.5T GVW compares to the Faraday, but looks far more futuristic]

Of course Tanfield and Ford recognised the Ampere dilemma some time ago and so have publicised the vehicle as the ideal city taxi-cab – previewed in New York – knowing full well that an Electric Taxi is aligned with Michael Bloomberg’s efforts to clean-up NY’s pollution and congestion, much of it created by Ford’s own aged Crown Victoria saloons used as the city’s Yellow Cabs. So the business case would be to demonstrate to hard-nosed small business owners the viability of Ampere from its almost ubiquitous appearance across the city.

London obviously pre-dated New York with deployment of the Congestion Zone, and taxis have been a central issue given their proliferation and associated emissions. At it’s here that investment-auto-motives believes that the taxi-cab business model will undergo a possible radical sea-change.

The introduction of TfL (London for Transport) private hire (Ford Galaxy) ‘black taxis’ means that a new breed of taxi sits as an interloper between classic ‘old fashioned Black Cabs’ (heavily regulated by the Public Carriage Office) and general mini-cabs (more lightly licensed conventional cars). This government-backed new breed has the might of the policy-makers on-side, and given that Ford is a favoured supplier, makes for the perfect launch-pad for latter-day introduction of the Smith Ampere, or its successor.

The fact that Tanfield has also signed an agreement to adapt the classic Black Cab – Manganese Bronze’s LTI TX4 (see previous post) – demonstrates that Tanfield looks to theoretically have a bright future.

Our interpretation of events is that in the years to come, as the regulatory impetus comes to pass to make London’s Black Cabs zero-emissions that the high-cost of buying an electric TX7 will be prohibitive to owner-drivers, who’ll also be weary of the technological implications/cost, and so only large taxi-lease fleet operators will be able to buy the products en mass and lease the electric vehicles to cabbies…much in the same way the trade worked in the 1910s and 1920s when the vehicles were unaffordable to the average cabbie. In due course again, it would make fiscal sense to eradicate the LTI TX7 vehicle for a suitable, standard electrically driven vehicle such as a Ford Transit Connect / Ampere.

investment-auto-motives believes that very few City analysts have even considered this latter day, big picture eventuality, but even for the few that have, that ‘pay-dirt’ is a long way off for Smiths and Tanfield group, and the probability is that as the reality comes to pass for electric cabs and electric light, medium and heavy logistics vehicles
Actually gaining market traction, Ford or perhaps another VM would look to an acquisition of Smiths or Tanfield. CEO Darren Kell undoubtedly has that far-off day in his business horizon. But for the moment, he is having to juggle City expectations whilst juggling the technical and contractual needs of his prime test-fleet clients; using the latter to convince the former.

Tanfield states that it build and shipped 260 vehicles in 2007, but states that 2008 will see production massively rise to 850-1100 units in 2008. As seen by the share-price fall (down 13% the day after disappointing results) analysts remain unconvinced that what should be a ‘good-news’ green gravy train is fulfilling the rhetoric. Observers also appear unconvinced at the synergies they’d hope to have seen develop between the electric vehicle division and Upright mobile platform acquired in 2006. The rationale is clear, targeting utilities companies with integrated products and equipment, but the order book, especially in that specialist arena ripe for efficiencies, appears to look less convincing.

The primary (non-Board) shareholders are as follows:

M&G Investment Management Ltd
Lansdowne Partners Ltd
DWS Investment GmbH
Goldman Sachs
Oyster Asset Management
Pictet & Cie

All will be looking to Darren Kell and his team to create a strong 2008 story, one that sets out perhaps a more detailed path of growth and value-creation than seen thus far.

Tanfield’s divisional balance, between electric vehicles / work platforms / electric engineering services, obviously appears on paper to be a good inter-related and highly synergistic portfolio, and a probable targeting of utilities companies well planned given the level of investment interest and the point in the business cycle for that field. If Tanfield can continue to orientate itself to be in the right place (as it seems to be doing) vs competition relative to the cycles of electric-truck fleet logistics and electric-taxi and small delivery sectors, all should in time be well - the technological seedlings planted yesteryear to provide green pastures for tomorrow.

Since the disappointing earnings report price-drop, confidence further waned, dropping below the £1 psychological barrier, but finding a support base at approx 94p and rebounding by Friday’s closing & Monday’s opening LSE price at 96.75p, rebounding 3.75%.

Whether the price will be buoyed by present big investor groups or by those Directors yet to hold stock or by third parties we’ll have to see, but creating that spark of investor interest with detail and progress of its coherent strategy and visibility of a transparent order book will be crucial.