Risk-tolerant investors looking for a turnaround trade should re-visit toymaker Hornby (HRN). It is making progress with self-help measures, orders for the key Christmas selling period are building at an encouraging pace and this could leave forecasts looking too conservative.

Hornby is the toy company behind beloved brands including the eponymous Hornby itself, slot car brand Scalextric, Airfix models, Humbrol paints and Corgi die cast models. It has been through a tough few years, issuing a string of profit warnings and lurching into the red. Bears question the growth potential of traditional hobby goods, as consumers switch to lower-ticket items or new technology.

Small Cap - Hornby - Aug 14

Heavy discounting of London 2012 merchandise, the collapse of Modelzone, its largest single customer, into administration in 2013, and exposure to the troubled eurozone and currency headwinds have all hurt the business. Yet the major issue has been supply chain disruption in China, which not only constrained sales of higher-margin model rail products but also risked Hornby’s long-standing retail relationships.

Former Ladbrokes (LAD) executive Richard Ames was appointed in April to drive the turnaround, which has so far seen a strengthening of its Far East supply chain and broadening of its Chinese factory base. Ames has also pushed through a move of Hornby’s UK logistics and warehousing from its historic Margate site to a new third party warehouse run by DS Logistics, which should help improve customer service.

Encouragingly, the £25.6 million cap’s latest market update (19 Aug) flagged year-on-year sales improvement in the four months to end-July, driven by positive performances from Corgi and Airfix as well as management’s successful shifting of aged stock. Furthermore, the launch of new websites for Airfix, Humbrol, Hornby, Corgi and Scalextric is already driving average order value growth and dramatic improvement in conversion rates.

Hornby says early indications for listings and orders ahead of Christmas are encouraging, suggesting scope for upwards revisions to re-based forecasts. Numis Securities forecasts a swing from £1.1 million losses to £1.5 million pre-tax profits for the year to March 2015, as sales rebuild to £54.8 million (2014: £51.6 million). By 2016, the broker sees profits reaching £2 million for near-40% earnings per share growth from 2.8p to 3.9p. Financial risk remains as Hornby is forecast to finish this year with £6.4 million net debt.

A modest rebound to 67.75p suggests the market is beginning to have faith in the turnaround story, even if a price to earnings ratio of 24.2 looks demanding following the decline in earnings.

[broker_consensus 0 0 1 0]



• Strong brands

• New CEO

• Relative resilience of hobby spend


• Net debt position

• No dividend

• Eurozone exposure


• Grow online sales

• European export growth

• Build US business


• Leveraged balance sheet

• Turnaround execution risk

• Foreign exchange swings


Issue Date: 08 Sep 2014