Hornby's financial updates to the Stock Market

[Fat Controller]

This was on the Kent Messenger site:-

http://www.kentonline.co.uk/kent-business/county-news/model-maker-Hornby-sandwich-12-million-pound-share-offer-to-fund-takeover-lcd-enterprises-oxford-diecast-135469/

Does anyone have an idea what the significance of the (American?) third-rail electric is ?

[leavesontheline]

This was on the Kent Messenger site:-

http://www.kentonline.co.uk/kent-business/county-news/model-maker-Hornby-sandwich-12-million-pound-share-offer-to-fund-takeover-lcd-enterprises-oxford-diecast-135469/

Does anyone have an idea what the significance of the (American?) third-rail electric is ?

 

Lazy journalism?

[MarkSG]

This was on the Kent Messenger site:-

http://www.kentonline.co.uk/kent-business/county-news/model-maker-Hornby-sandwich-12-million-pound-share-offer-to-fund-takeover-lcd-enterprises-oxford-diecast-135469/

Does anyone have an idea what the significance of the (American?) third-rail electric is ?

 

The curse of the inappropriate stock image

 

Local newspapers are particularly prone to it. They just pick from their image library based on keywords rather than making any real attempt to find the right image for the article.

 

https://www.istockphoto.com/gb/photo/model-train-gm478025448-67090129

[Mike Storey]

Interesting indeed.

 

a) The share price has already risen 3.5% in one day since the announcement.

b) Phoenix seem to have taken the majority of the new shares and will increase their shareholding from 71% to 74% if all goes to plan.

c) The 49% stake in Oxford (LCD) is convertible to 100% (or 0%) at a capped price  in the event that Lyndon Davies' status in LCD changes (other than death or disability)

d) all shares seem to have been placed subject to shareholder agreement to the placement and the strategy on 5 Dec.

 

What I do not understand is:

 

1. Why is anything conditional on an AGM when the majority shareholders (including one "independent") have already acceded? I presume this just a legal procedural necessity.

 

2. Why has a strategy supported by Phoenix only very recently, been so rapidly been reversed i.e. from contraction into fewer, more profitable products, to an expansion plan into additional markets within a few months?

 

3. Why only a minority stake in LCD, when the "alignment" in Lyndon Davies' interests all depend upon Hornby's shareholders generosity?

 

 

I can see the logic in the expansion proposal, especially at a time when Piko are showing there is a way ahead with good product differentiation, and in a growing European market. I can see the need to avoid the 31 December covenant crisis. But Oxford will continue to run as a separate entity, so the only concrete benefits would appear to be access to Oxford's production line, shared marketing and sales forces, and a new synergy in product development perhaps.  I just don't see how this new "strategy", relying on only a £1m increase in capital expenditure, is going to get them there. It strikes me more of a holding position to avoid a "going concern" crisis, whilst they come up with something a little more credible and substantial. Will that require further capital (given their Barclays borrowing limit is being progressively reduced) or will they rely on the savings to be made through the overhead reductions potential they have only just "identified"?

 

Of course I wish them every success, despite my confusion. No doubt, others will have contrasting views!

[jjb1970]

I think it quite positive that Phoenix seem to be thinking in terms of a long term strategy rather than some sort of strip out to grab instant "value" for shareholders at ruinous cost to the future of Hornby and also that they still seem to see the future of Hornby firmly as a model company, albeit with a wider catchment than just high end, high margin products.

If Hornby have been observing the rise and rise of Piko (at the expense of marques that at one time would have looked down their noses at the idea of being compared with Piko) then that is no bad thing, and in some ways the positioning of Oxford Rail (i.e. good, detailed models at a lower price point) has a lot going for it as a complement to Hornby full fat. I also think there is potential for Hornby now to differentiate their product line using the Hornby, Oxford and Railroad brands (full fat, mid range hobby and low end trainset).

And it confirms what was obvious when they appointed Lyndon Davies in their buying into Oxford.

[Clearwater]

I wonder how close to the last roll of the dice we are from Phoenix.

 

The operating results are pretty dreadful. Looking at gross profit, there is a small reduction in the percentage margin. Why? Surely the strategy of ending discounting should increase that figure? I appreciate the reduction in product lines drives a top line reduction in revenue. Eyeballing it, some cost categories move proportionately but "Admin expenses" only reduce by £200k or so (way less than the percentage reduction in revenue) and the "Other Operating Expenses" swings from £900k (positive so some sort of income or restatement??) to £490k negative. An adverse swing of £1.5m or so which is pretty much the same as the increase in the operating loss line. I'd like to understand what's going on in those figures in particular.

 

David

[JSpencer]

They clearly still have something wrong in their operating costs.

 

Phoenix have been convinced that something will work. Though there is bit of a threat in there. "Buy our shares or we cannot meet the banking agreement". But without further details on how costs are going to get reduced, it is hard for me to see this as a viable investment for now.

 

The only thing I see is Oxford Diecast on the international scene. My local news agent already sells their cars. 1million in new investment is going to allow Hornby to attack on all fronts. But The front is still retreating and needs to be consolidated first.

 

Oxford Diecast does plug a hole in Hornby's range. For railways, it will either have to be Oxfordrail disappears and their models merge into the Hornby range (the range gets a bigger audience but expansion is really limited to just Hornby) or it remains independent (the range can carry on growing). I cannot see the point in selling the exact same model under two different brands. The customers in this market will know blatantly well that there are no differences between them and the box colour will make no difference to sales.

 

The ship is still sinking so they are trying to use another ship to tow it to safety.

They should make a lot of H class 263, that will better their figures.

[Silver Sidelines]

Am I missing something but has the new Hornby CEO arranged for Hornby shareholders to give him a lump sum for his Oxford Diecast business?

 

Ray

[Ron Ron Ron]

I wonder how close to the last roll of the dice we are from Phoenix....

 

It does look dire.

Without this share issue, it appears the doors might be closing pretty soon.

It also looks like most of what funds are being raised is going straight out of the door again and the prospects for the coming market conditions don't fill one with much hope.

 

So it is a wonder. One last role of the dice, put everything on Red?

 

 

.

[Clearwater]

Am I missing something but has the new Hornby CEO arranged for Hornby shareholders to give him a lump sum for his Oxford Diecast business?Ray

I would have thought he is/will be taking that cash to buy shares in Hornby though I’ve seen no mention of that. Without putting cash in, it’s a one way bet for him!

[Caledonian]

 

...For railways, it will either have to be Oxfordrail disappears and their models merge into the Hornby range (the range gets a bigger audience but expansion is really limited to just Hornby) or it remains independent (the range can carry on growing). I cannot see the point in selling the exact same model under two different brands. The customers in this market will know blatantly well that there are no differences between them and the box colour will make no difference to sales.

 

 

 

A merger would make sense if it was done selectively.

 

While they are not perfect, the Oxford wagons are superior to most of the Hornby ones - or at least the ex Airfix/Dapol and older ones, so replacing them with the Oxford ones could be a good move.

 

There really needs to be a good long hard look at the Railroad range if only to achieve some consistency and chuck out the rubbish like the faceless troublesome trucks 

[Steamysandy]

This is a personal opinion.The present Hornby company is the successor to the Tri ang trains of the 1950s.When Lines Brothers bought out Hornby Dublo they sold off the excess stock(10,000 sleeping cars according to one account!)

The stock mismanagement of the original Hornby company was what led to their downfall.Thereafter Hornby was looked on as a toy company with TOY trains.This has over the years led to the Mish mash of models in the Railroad range.But times change.

Model trains are a specialist market and we don't all have bottomless pockets but also Steam trains ended 50 years ago after all.Perhaps Hornby should be set up as a specialist Model Train Company on its own with the acceptance that it's a declining market because of age and the passage of time.

Maybe we should be grateful for what we've got

[Grovenor]

Am I missing something but has the new Hornby CEO arranged for Hornby shareholders to give him a lump sum for his Oxford Diecast business?

 

Ray

Yes, although he has to pay it back if he leaves within some unspecified period so can't spend it yet!

Regards

[Grovenor]

I would have thought he is/will be taking that cash to buy shares in Hornby though I’ve seen no mention of that. Without putting cash in, it’s a one way bet for him!

I would be very surprised if he was to do that considering he has to be able to refund the cash if he leaves early!

Regards

[jixer]

Well, the way this is going who knows what's next? Hornby/Oxford/Dapol anybody? :-)

 

It's fascinating to see how Lyndon Davies has benefitted here. He certainly has the potential to gain much and lose relatively little. I guess that perhaps shows how compromised the underlying business is.

 

Personally, I think the core Hornby business is still hugely compromised (years on!) from the Sander Kan debacle (well played, Kader/Bachmann!) and failing to follow that age-old business mantra: 'stick to your knitting!' But l think we all hope that Mr Davies has the drive and the ideas to bring the business back.

[Clearwater]

I would be very surprised if he was to do that considering he has to be able to refund the cash if he leaves early!

Regards

If I was Phoenix, I’d want him to have real money at risk. A reinvestment aligns his goals with theirs. It’s quite common to see that in private equity. If Davies has got away without investing his cash, then he has got a great deal. What’s his downside? He coasts for 12m and then picks up a cheque (query what the Oxford/Hornby shareholders agreement says about purchase of each other’s shares) or he makes Hornby profitable and gets a bonus? If he has got a deal like that, it highlights how weak Phoenix’s position is. We get a flavour of that in the poor results for the 6m to 30/9/17 just prior to Davies’ appointment. As I commented before, it was odd that the ‘merfer’ Was not simultaneously announced with Davies’ appointment.

 

David

[The Stationmaster]

I would have thought he is/will be taking that cash to buy shares in Hornby though I’ve seen no mention of that. Without putting cash in, it’s a one way bet for him!

 

And time here to mention what Hornby/Phoenix through Hornby are actually buying - and that is 49% of LCD Enterprise which is not quite the same thing as Oxford Diecast.  LCD Enterprises had, until this deal, only two shareholders - Lyndon Davies and his wife and it, not Oxford Diecast, has holdings in other businesses including a part share of a factory producing diecasts situated in Hong Kong.  It might also have a part share in a factory in mainland China involved in producing model railway items for various concerns but that has never been clear and Chinese people in that area have in the past denied that Oxford 'own' the factory outside which an Oxford sign was pictured - so the truth or otherwise of that one is a little murky and it certainly doesn't show up in LCD's filings unless the Hong Kong company has a financial interest in a mainland factory.  

 

LCD also has involvement elsewhere but the details can't be ascertained from Companies House filings.  As at 31 December 2016 LCD Enterprise held 91.37% of the then issued share capital of Oxford Diecast (seller of diecast vehicles) and 50% of the issued share capital of Oxford Diecast (HK) Ltd (manufacturer of diecast vehicles); any other LCD holdings amounted to less than 50% of whatever companies might be involved and were accordingly not declared

 

So what Hornby/Phoenix is acquiring through buying a substantial part of LCD is at least partial control,  c.25%, of a Hong Kong factory producing diecasts plus partial control of Oxford Diecast (and by inference Oxford Rail), c.44%.   No wonder it has done the share price some good, Hornby has almost got itself a factory making diecasts plus bought into what appears to be a commercially successful diecast vehicle range!  (whither Corgi I wonder?)

 

Some aspects of what has been posted above worries me for the future of hi-fi Hornby railway models with an implication that they might be heading elsewhere for other supposed market areas (although it is unclear if that means model railways or other brands such as Scalextric and Corgi?).  Personally I would have thought it in their interest to milk the 'grey £' for all they can whilst it is there to be milked and to 'do a Piko' as far as model railway ranges are concerned and get Railroad turned into a recognisable mid-range brand alongside a proper 'starter' brand.  I suspect the first area of change might well be the Corgi range but we might find out more at Warley next weekend (unless people have been gagged).

 

Meanwhile it is strongly rumoured that Hornby are withdrawing from the commissions market (Kohler influence at work?) and that trade terms are again being revised with the period for payment being reduced.  Yet again they seem to have scored an own goal as far as commissions are concerned.

Edited November 18, 2017 by The Stationmaster

[jjb1970]

I know this won't be a popular opinion (it's not one I like myself) but I think they should revisit direct sales and consider a change to manufacturing to pre-order for some of their lines. That could potentially include a select number of retailers. I think they need to suppress their own costs but I also think that cutting out the retailer margin and manufacturing to order could make their prices drop and de-risk projects. As I say, I hate pre-ordering and like shops but if I was Hornby it's something I would be considering.

[Legend]

I know this won't be a popular opinion (it's not one I like myself) but I think they should revisit direct sales and consider a change to manufacturing to pre-order for some of their lines. That could potentially include a select number of retailers. I think they need to suppress their own costs but I also think that cutting out the retailer margin and manufacturing to order could make their prices drop and de-risk projects. As I say, I hate pre-ordering and like shops but if I was Hornby it's something I would be considering.

Yes I think the last lot of management saw direct sales as the way of grabbing retailers margin and their own. They didn’t consider the consequences on their traditional retailer base though. While direct sales are good (for the manufacturer) it would be very difficult to do that without alienating an already sensitive retailer market. I think you really have to do one or other.

 

You are correct, however, they are now competing with the likes of Hattons , Kernow and Rails who ironically, coming from the other direction have indeed achieved the objective of combining retailer and manufacturer margin to themselves. An unfortunate consequence of outsourcing manufacturing, now anyone can do it and it’s a much more open field, with lots of new competition.

 

A really tricky time for Hornby , but also Bachmann . And if you are a model shop proprietor , seeing all these special commissions appearing which you can’t get a piece of the action on, it must be a very worrying time. The market has changed.

[adb968008]

It maybe that for the next year or two, Oxford rail goes quiet, but I still think if this all goes south Oxford might end up owning a nice share of Hornby toolings, especially if in the interim they already make the move from the various Chinese factories into the Oxford one for production.

 

I can’t help thinking the silence of the new mk3’s has been deafening, let see if they appear before jan 2018 or who knows Oxford rail may even be shelved for a while whilst the management team focus on Hornby.

 

The ones I think are most threatened by the new strategy will probably be the big box shifters, and possibly the major high st retailers whom have often picked up bargain basement stock (of all brands). In the case of the high st, I doubt there will be significant impact, but the box shifters are being caught in a perfect storm.. prices are high, competition is strong, lack of bargains must also be matched by lessening production (Heljan and Bachmann have had quiet years too, and the little producers haven’t made much impact on the box shifters stock). Whilst Hornby embark on a plan to gain trust of the high street, the cost maybe that the box shifters go more OEM with new tools.. the very thing Hornby doesn’t need is more competition, but it’s hard to see the Barclay and P as not being successful and the market would certainly be ready for more.

Edited November 18, 2017 by adb968008

[jjb1970]

Phoenix would appear to be in that difficult position of having to judge whether what is needed is further effort and resource, or whether it is time to pull the plug to cut their losses. Not a nice position, and one for which there may be no real right or wrong answer as it all depends on implementation of a turn around plan and whether it works.

[Legend]

It maybe that for the next year or two, Oxford rail goes quiet, but I still think if this all goes south Oxford might end up owning a nice share of Hornby toolings, especially if in the interim they already make the move from the various Chinese factories into the Oxford one for production.

I can’t help thinking the silence of the new mk3’s has been deafening, let see if they appear before jan 2018 or who knows Oxford rail may even be shelved for a while whilst the management team focus on Hornby.

I think Oxford Rail will now quietly be shelved. Hornby is not going to compete with itself at the low cost end of the market

[jjb1970]

Yes I think the last lot of management saw direct sales as the way of grabbing retailers margin and their own. They didn’t consider the consequences on their traditional retailer base though. While direct sales are good (for the manufacturer) it would be very difficult to do that without alienating an already sensitive retailer market. I think you really have to do one or other.

 

You are correct, however, they are now competing with the likes of Hattons , Kernow and Rails who ironically, coming from the other direction have indeed achieved the objective of combining retailer and manufacturer margin to themselves. An unfortunate consequence of outsourcing manufacturing, now anyone can do it and it’s a much more open field, with lots of new competition.

 

A really tricky time for Hornby , but also Bachmann . And if you are a model shop proprietor , seeing all these special commissions appearing which you can’t get a piece of the action on, it must be a very worrying time. The market has changed.

Indeed, Hornby are now competing with direct sellers (Kernow, Hattons, Rails, NRM) and it'd be interesting to see an objective analysis of the respective share of models bought in person from physical shops and those ordered on-line. I suspect that people like model shops, and use them for the small ticket stuff but that rolling stock sales are probably weighted towards mail order and on-line sales. For most of us the train left the station years ago and won't be coming back in terms of having access to a local model shop selling locomotives and rolling stock and I pretty much rely on the local branch of Hobbycraft for adhesives, paint, scenic materials etc.

[adb968008]

A really tricky time for Hornby , but also Bachmann . And if you are a model shop proprietor , seeing all these special commissions appearing which you can’t get a piece of the action on, it must be a very worrying time. The market has changed.

Quite, the margins for a retailer cutting out the supplier are considerable, especially when the design is done in China too, that’s two links cut from the supply chain, then there’s much less Admin overhead with a small retail outfit, and the retailer is achieving full RRP too.

 

However it needs to be balanced against the significant outlays of cash needed in large chunks to make it happen, and presumably storage to keep stuff warm until it’s sold, which in this industry can sometimes take years. The retailer needs to have deep pockets or a loan to make this happen.

 

What we could see next is the splitting cost method, where by one retailer takes the design gamble into production, but then offers one or two limited editions to other retailers who are prepared to buy 250 or so for an exclusive livery to reduce the cost of their investment.

 

For example if someone was to cleverly design a chassis, that could be used under a Manor, 43xx and 51xx, then go to market with the three over a time period, I could imagine there being interest from several parties for exclusive numbers associated with the different Manors, whilst the tender can be reused on the 43/53/73/93xx and the costs of the 51/61xx come right down and only use a body but faces a market without a new such model in decades at a reasonable price.

 

It could even be three retailers taking development costs of one body / pony/bogie costs each of the three but sharing the chassis design (and Manor/43xx for the tender / cabs) costs.

 

Of course another thing could happen, since Sanda Kan, China has apparently grown a train savvy development resource, and when orders from UK manufacturers start to fade, they could start hunting for business and increase their promotion to retail directly for business.

Edited November 18, 2017 by adb968008

[jjb1970]

Manufacturing to pre-order de-risks and should avoid sitting on stock for years. Some of the new players also ease cash flow by taking deposits up front nd offering the option to pay in full when ordering.