Hornby battles to build a head of steam

For a company whose model trains usually chuff along behind the closed doors of spare rooms or basements, Hornby’s recent uphill struggles have been very much in the public eye.

The Kent-based toymaker’s troubles steamed back into view a month ago, when it announced a third profit warning in a year, which sent its share price tumbling.

That gloomy sentiment was reinforced on Friday when Hornby announced a first-half loss of £540,000 – down from a pre-tax profit of £1m a year ago – as revenues fell 5 per cent to £26.9m.

In 12 months, the market capitalisation of the group – which also owns the Scalextric model car racing brand, as well as Corgi die cast toys and Airfix model kits – has fallen almost 60 per cent to £22m.

Hornby’s latest move has been to appoint Roger Canham as its new chairman, replacing Neil Johnson in the role that he has held for a dozen years.

Mr Canham is also chairman of Phoenix Asset Management, Hornby’s second largest shareholder with a 10.6 per cent stake – a fact that raises issues about potential conflicts of interest, and suggests concerns over the toymaker’s strategic direction and share price.

Hornby says that the two parties have “entered into an agreement to regulate the relationship between them so as to avoid any conflicts of interest”, and stresses that “Mr Canham is not joining the board of Hornby as an agent or representative of Phoenix, and is not otherwise acting for or on behalf of Phoenix”.

Frank Martin, Hornby chief executive, says: “It is entirely reasonable for major shareholders to want to have in place someone on the board who they felt will do the best possible job in the circumstances. The fact that it happens to be someone who is also the chairman of one of our major shareholders is more a coincidence than anything else.”

Phoenix says it is pleased with Mr Canham’s appointment to the board of Hornby, but declined to comment any further.

One of his first tasks, with Mr Martin, will be to put the company’s supply chain back together.

Hornby had been a UK manufacturer, in miniature, for more than 90 years. Frank Hornby first patented his Meccano construction toy in 1901, and went on to produce his first clockwork train in 1920. But, in 1995, Hornby shifted its production to China, in an effort to keep a lid on costs.

Although initially a success, the outsourcing move has backfired of late, after its biggest manufacturer closed several factories, cutting supplies of Hornby models.

“Hornby continues to work through supply issues, and is operating comfortably within its banking facilities,” says Andrew Wade at house broker Numis. However, he adds: “The group should return to profitability in due course, but more tangible evidence of stability may be required for the shares to stage a meaningful recovery.”

Hornby has reduced the proportion of its products made in China from three-quarters a few years ago to around 35 per cent today.

Nevertheless, the supply chain problem has exacerbated a sales downturn caused by a focus on Olympic Games merchandise. Hornby had pinned its hopes on its London 2012 range, initially suggesting that sales of such products as Scalextric cycling velodrome sets, London 2012 taxis and Olympics-branded double-decker buses would drive profits.

But, instead of a podium finish, Hornby was left with a glut of merchandise sitting on the shelves, as consumers – too busy watching the Olympics to go shopping – shunned its products.

Hornby says the strategy – which was meant to provide a £7m boost to full-year revenues and add £2m to pre-tax profit – will knock £1m from its bottom line in the current financial year.

Combined with the supply problem, it is forecast to wipe out group pre-tax profit in the 12 months to March 31. In the previous year, pre-tax profit had been £4.1m.

To broaden its toys’ appeal, the group is now selling products based on the popular children’s television series Olly the Little White Van, as well as a Star Wars-themed range of Scalextric racing sets.

It has also responded to the consumer downturn by introducing lower-priced train sets, complementing high-end sets that sell for as much as £275.

“I have every expectation that, by this time next year, we should be largely through the supply chain disruption,” says Mr Martin. “As we go into the financial year commencing April 2014, that will have been resolved completely.”

However, with intensifying competition from video games and consoles, a return to previous share price highs looks a long way down the line.