Hornby Annual Results year ended 31 March 2018

[jjb1970]

The relationships between the suppliers we are familiar with and the actual manufacturers in China are one of those topics which is always difficult to hold an opinion about. I'm sure some of the stories about murky goings on in China are accurate, I'm equally sure blaming bad things on nefarious practices in China is an easy excuse to explain away lots of things. There is no doubt that business in China is different to doing business here, but it isn't the wild west pirate republic you might think from some descriptions.

[DJM Dave]

We've seen the preview for this movie already. Hornby PLC had to write down expenses as "special charges" related to recovering tooling that was in the possession of Kader (ex-Sanda Kan). I don't remember in which year/report this is listed.

 

Possession is nine tenths with tooling. At the time we had significant discussion on the topic. As I understand it the physical tools are really only suited for a particular injection machine, and will normally stay with a particular factory. (I imagine it is possible to rig adapter plates to suit a new machine.)

 

At the very lest, the tools are, as Mike notes, negotiable assets.

Not only that, but selling someones tools from under them is very problematic, China or not.

for instance, if they are owned outright, and you have letters of ownership, the factory can do what it wants, but caviet emptor will rule for anyone that tries to make the models and import them into the UK.

 

I would imagine that anyone who owned tools being used without their permission would get an easily granted injunction to stop third parties from gaining benefit of such owned tools, and as such the models would be 'tainted' as would the purchaser / importer.

 

It's risky for the factory too, as if it got known they were selling their clients lawfully owned tools from under him, no matter what the reason, without their clients permission, word would get round in the community world wide and that factory would never get work again.

 

Of course, proving the models came from your tooling would be quite simple as they mostly all have identifying marks known mostly to each company, so a large re-tool would be the only thing to do to try and make it a 'new' model, and hope to get away with it, but its a hell of a risk for said recipients of models from anothers tools.

 

Mostly these occassions are based on brinkmanship and ransom, and who blinks first and opens the wallet or aquiesses.

[Revolution Mike]

The relationships between the suppliers we are familiar with and the actual manufacturers in China are one of those topics which is always difficult to hold an opinion about. I'm sure some of the stories about murky goings on in China are accurate, I'm equally sure blaming bad things on nefarious practices in China is an easy excuse to explain away lots of things. There is no doubt that business in China is different to doing business here, but it isn't the wild west pirate republic you might think from some descriptions.

 

Agreed - perhaps we've been lucky so far, but our experience is that the majority of people are highly skilled, professional people that take a great deal of pride in what they do and that provided you give them decent information and discuss with them what is/isn't possible (and pay your bills!) then you will get a good product from them.

 

Cheers, Mike

[jjb1970]

Agreed - perhaps we've been lucky so far, but our experience is that the majority of people are highly skilled, professional people that take a great deal of pride in what they do and that provided you give them decent information and discuss with them what is/isn't possible (and pay your bills!) then you will get a good product from them.

 

Cheers, Mike

 

I agree. I've done a lot of work for Chinese clients over the years and acted for other clients building ships there. You hear a lot of horror stories about Chinese built ships and I think 15 - 20 years ago they were well behind the curve in terms of quality if compared to the Japanese and Korean's (but then, so was/is everybody else) but over the last decade I found you get what you pay for there. If you seek a minimum cost ship from a lower tier yard then don't be surprised if you get something mediocre and not especially well built. Pay for high quality and they can deliver world class quality and design in ships (and even at the top end, at lower cost than the Korean or Japanese yards for comparable designs).

I think you touch on something that tends to be forgotten (or ignored) when discussing business in China, namely that integrity and compliance with contractual stipulations is a two way thing and the Chinese are not the only party with responsibilities to deliver stuff. My experiences were like yours in that if you respected the contract and fulfilled your obligations then so did the Chinese. I have to say that each time I've observed things go wrong on that score it has never been as simple as a wicked Chinese factory scamming the gullible.

I've noticed a big change on the IP front too. At one time IP was a real issue over there and controlling drawings and plans was a nightmare but as the Chinese become innovators in their own right and technology exporters so their attitude to IP is changing. You might say that this is just China closing the door once they've gotten what they wanted, and it is true, but it is also true for just about every country that's industrialised including in Europe and North America.

OK, my work has been in a completely different sector to model trains, one where the sums changing hands can be large by any standard but many of the arguments seem to be pretty similar. I'm not oblivious to the issues in China or the less commendable aspects of the country but I do find there is something unfair and unpleasant in many attitudes to China.

[Clearwater]

Oxford Diecast has done quite well, turnover has been close to £4mn for the last 3 years, profit of c£800k over those 3 years.https://document-api-images-prod.s3.eu-west-1.amazonaws.com/docs/2nCTAajaUW-6usFeagQYnqER934C-8E2Owbxoue9Qf4/application-pdf?X-Amz-Algorithm=AWS4-HMAC-SHA256&X-Amz-Content-Sha256=UNSIGNED-PAYLOAD&X-Amz-Credential=ASIAJAV4DSKKI3CDTZ4A%2F20180626%2Feu-west-1%2Fs3%2Faws4_request&X-Amz-Date=20180626T143720Z&X-Amz-Expires=60&X-Amz-Security-Token=FQoDYXdzEKX%2F%2F%2F%2F%2F%2F%2F%2F%2F%2FwEaDFNo7uTGKXO9R8AaNCK3A40iWH0t80yw4NJJoSZppPMD13GD5xbIG7jVNemQnOPLcKAweGP15VdvIQ5oKtjlnfndERjTj%2F%2BSzeBq3ocng%2B6cDsapmv0BsnxAkHTxuBzaf32%2Bsqn9kEBAiD%2BdDziWvViA33JgGb6v5qu3Ks7r9UVenc4xfn3Xkke%2B9IEopd4dinEJPzzgh02TAun7Ej%2FhXZt14IvuL3G%2BgeOpDwm3qq3NlJ9F9GUaR5aZbgIfCHsXAGYEyFhH2acKUK%2BLX2ZDWkGWFCoVMXtxweCkYoKdZU8bcw2kQd6bAsIKgBU5ISYs9Fyz3pdLR1J0OwHkhP%2B4ZnM64Qb2NbsVudJzV1UgcCJg3cE4zNlQ0oVPeuCS7%2F8Etp8JQyqA7wjDx80Q8QbUP%2BmoWJGUXbZjfvVxmg%2B84QhCFarOxNbcm7PycEekun2OX4eZMZi%2Fct2uP6uj76N%2B4DIf%2BGaPRG5sAXGkgWG4%2FuQ0fiIa4jnjXK4qdsohJPu5jwQMtPoq54FgHL7myvVUWlSPckXaQUyhD8p78NTR%2FEwEjRe17CYyg8QbYalLGUDXxDc7MkYqNgB1JcQ3Tf2uOHJaZRFH6Hool8zI2QU%3D&X-Amz-SignedHeaders=host&X-Amz-Signature=775fb0d685961eebb9d7828339bc103d4dc716508c1fc5d373ca3ea9395a1b98

But I recall reading Hornby bought a 49% share of LCD enterprises...That’s a different story..https://document-api-images-prod.s3.eu-west-1.amazonaws.com/docs/GFKkOTw7MdAjWXaDvirmAZOmNyjr63s3US-ifvS53ec/application-pdf?X-Amz-Algorithm=AWS4-HMAC-SHA256&X-Amz-Content-Sha256=UNSIGNED-PAYLOAD&X-Amz-Credential=ASIAIGJYJC5YBXCAXZDQ%2F20180626%2Feu-west-1%2Fs3%2Faws4_request&X-Amz-Date=20180626T140837Z&X-Amz-Expires=60&X-Amz-Security-Token=FQoDYXdzEKT%2F%2F%2F%2F%2F%2F%2F%2F%2F%2FwEaDD%2F3fgLfRALRcRCjmSK3A8z1wB25NwS0%2BPWmzO8%2FBKURVrrk%2FCPLTyglHJ1OtARGM3nBO%2BFOSPYdZ6kA35D4HMXu0jO4BFgIn6rfJvOzUlzekOs%2B93KRooON4xTcZvgxPIZ%2B9fyg0B4wpzLGeY8pIGZoiFYOxtL2aZjtvYejwhHIfwjykN%2BC5BSeHqHwExZd%2B%2B7GMY0b2jrBNx45u%2BgI%2BmkDLyXY03uYqycstSML50vuwFh0bEZp2Mr5JDJ3hpS204OlsNJmnoaQgr0mqnGosE9du1l%2BlF4Nsil4gCuC6Tch5ltt989Si8ukNQZqfB8RnjQXMke4bxLBhfbYh1%2FceSLXKPz2LezLrX%2FO7TvNLYozVITawf0yJGyaWXkTSegGUgDZw5BjNWRt1q3LOOBrYEsIogaDqxyxaNb4wE9d2LFETk5ZaXjJJAt7qfuf4UDOWQvmRjSqaguanygscfkwMN1FMNjD8qbB1KsCAGdr0iQ53uQ46XwgyZLPBkjdAHOchiMjR2UV9c1aycoiciHYMXMCy60i1uLw402xWUEwfwKooFglBRjWg9E0tvq3WlplLSRvUcVJ1br4YeiY7Q4wiOPUq3EHU5AojcHI2QU%3D&X-Amz-SignedHeaders=host&X-Amz-Signature=1b5ccb7a84e2d91a0a76614c61c9ed5ed72a31d96d5795b0937977768f94c009https://document-api-images-prod.s3.eu-west-1.amazonaws.com/docs/ALTA9FkCPZWK2ouZe2y3PpMCxXK2JbSQbrlHZ2rKZEQ/application-pdf?X-Amz-Algorithm=AWS4-HMAC-SHA256&X-Amz-Content-Sha256=UNSIGNED-PAYLOAD&X-Amz-Credential=ASIAJAV4DSKKI3CDTZ4A%2F20180626%2Feu-west-1%2Fs3%2Faws4_request&X-Amz-Date=20180626T140426Z&X-Amz-Expires=60&X-Amz-Security-Token=FQoDYXdzEKX%2F%2F%2F%2F%2F%2F%2F%2F%2F%2FwEaDFNo7uTGKXO9R8AaNCK3A40iWH0t80yw4NJJoSZppPMD13GD5xbIG7jVNemQnOPLcKAweGP15VdvIQ5oKtjlnfndERjTj%2F%2BSzeBq3ocng%2B6cDsapmv0BsnxAkHTxuBzaf32%2Bsqn9kEBAiD%2BdDziWvViA33JgGb6v5qu3Ks7r9UVenc4xfn3Xkke%2B9IEopd4dinEJPzzgh02TAun7Ej%2FhXZt14IvuL3G%2BgeOpDwm3qq3NlJ9F9GUaR5aZbgIfCHsXAGYEyFhH2acKUK%2BLX2ZDWkGWFCoVMXtxweCkYoKdZU8bcw2kQd6bAsIKgBU5ISYs9Fyz3pdLR1J0OwHkhP%2B4ZnM64Qb2NbsVudJzV1UgcCJg3cE4zNlQ0oVPeuCS7%2F8Etp8JQyqA7wjDx80Q8QbUP%2BmoWJGUXbZjfvVxmg%2B84QhCFarOxNbcm7PycEekun2OX4eZMZi%2Fct2uP6uj76N%2B4DIf%2BGaPRG5sAXGkgWG4%2FuQ0fiIa4jnjXK4qdsohJPu5jwQMtPoq54FgHL7myvVUWlSPckXaQUyhD8p78NTR%2FEwEjRe17CYyg8QbYalLGUDXxDc7MkYqNgB1JcQ3Tf2uOHJaZRFH6Hool8zI2QU%3D&X-Amz-SignedHeaders=host&X-Amz-Signature=138365f1168b45c7bc5ba45c280e33efd7cb8d9510bceb928fbcf625aa8e3488

LCD has turnover of £77k (2017) / £81k (2016) / £80k (2015)

Plus fixed asset income £100k / £49k / £51k

Total incomes has represented £198k / £144k / £184k

This has produced profits of £158k / £132 / £174k

This is much closer to a £2mn business.

There is no description of the activities of this business, but does mention a 91% stake in Oxford Die-cast UK, and a 50% stake in Oxford Diecast HK.

  

Correct, Hornby bought a share of LCD Enterprises and not of Oxford Diecast (except the extent that the holding in LCD Enterprises gives them downstream holding of part of Oxford Diecast and Oxford Diecast HK).  Hornby PLC's 49% holding in LCD Enterprises effectively gives them a c.44% holding in Oxford Diecast and a c.24% holding in Oxford Diecast HK plus a smaller overall holding in any other concerns in which LCD Enterprises has any form of shareholding (none are declared in it accounts indicating such holdings are less than 50% and might in fact be comparatively minor).  

On valuation, I'd take a "sum of the parts" approach:

1) First value Oxford Diecast

2) value LCD Enterprises exc. the associate income

 

Value of 100% of LCD enterprises is (2) plus 91.7% of (1). Hornby's stake is then worth 49% of the two. Small companies, particularly in risky sectors such as this, don't really command higher valuations than the 4-6x EBITDA range.

 

 

However, I'd note that the 100k income reported as Associate Income is significantly more than the dividend reported from Oxford Diecast. THerefore there's c£50k of other income to include in the valuation. Let's value that at 5x dividend to add £250k to the valuation. Alternatively you can value the EBITDA from LCD and then capitalise the associate income on a similar basis.

 

From the table above, an overall value of around £3-4m doesn't seem unreasonable. Hornby's accounts state they paid £1.6m (note 11). That values LCD Enterprises at £3.265m. Given we don;'t have full information, it doesn't look a particularly bad deal for either party with the caveat that some private groups can have fairly labyrinthine structures...

 

David

[JSpencer]

It seems that the model industry in general is facing a world wide problem. The young are generally less interested in making models and the market is aging.

 

Here Tamiya talks about problems manufacturers face recovering investment. Hornby is mentioned here in (note article is translated Japanease):

 

https://tamiyablog.com/2018/06/the-crisis-of-plastic-model-industry/

[robmcg]

It seems that the model industry in general is facing a world wide problem. The young are generally less interested in making models and the market is aging.

 

Here Tamiya talks about problems manufacturers face recovering investment. Hornby is mentioned here in (note article is translated Japanease):

 

https://tamiyablog.com/2018/06/the-crisis-of-plastic-model-industry/

 

The Japanese commentator certainly sees no future for conventional die-based production, at least in the context of large companies with broad corporate interests.

 

It might be that Hornby under Phoenix will be more nimble and frugal than some of the US and Asian players?

[BWsTrains]

  On valuation, I'd take a "sum of the parts" approach:

1) First value Oxford Diecast

2) value LCD Enterprises exc. the associate income

 

Value of 100% of LCD enterprises is (2) plus 91.7% of (1). Hornby's stake is then worth 49% of the two. Small companies, particularly in risky sectors such as this, don't really command higher valuations than the 4-6x EBITDA range.

 

IMG_0279.PNG

 

However, I'd note that the 100k income reported as Associate Income is significantly more than the dividend reported from Oxford Diecast. THerefore there's c£50k of other income to include in the valuation. Let's value that at 5x dividend to add £250k to the valuation. Alternatively you can value the EBITDA from LCD and then capitalise the associate income on a similar basis.

 

From the table above, an overall value of around £3-4m doesn't seem unreasonable. Hornby's accounts state they paid £1.6m (note 11). That values LCD Enterprises at £3.265m. Given we don;'t have full information, it doesn't look a particularly bad deal for either party with the caveat that some private groups can have fairly labyrinthine structures...

 

David

David,

 

your knowledge of these Valuation techniques is clear, but it occurred to me that the difference between your derivation of EV and a 'Market based" EV might need some clarification for others better understanding. As I'm 17 years retired from this line of work, apologies for any errors in what follows.  

 

 

Enterprise Value as a sum of Parts is calculated according to Investopedia: as the market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents.

 

EV = market value of common stock + market value of preferred equity + market value of debt + minority interest - cash and investments.

all these should all be publicly known so it is a Market Based EV.

 

When you do an EBITDA based multiple valuation (= before interest) my recollection is you are going to add in any non-consolidated minority interests (because they don't feed into EBITDA), before comparing the derived "Operating" EV to the Market Based EV.

Then it becomes interesting to see if underlying Earnings and their potential forward profile compares favourably to the Market view of Equity value or not.

 

Colin

[Clearwater]

Hi Colin

 

I’d agree with your difference of a market based Calc and my quasi fundamental valuation. In the case of LCD, there is no listed equity/debt on which to take a market based approach valuation. In any event, I’d use a market based ev approach to see whether I perceived value in the listed stock relative to my own assumptions. I’ve also not adjusted for other common issues such as pensions, any net cash in the business, known impairments - I’m sure there are others. I was trying to do a simple ‘back of envelope calc’ to see if the figure quoted for Hornby’s “investment” in LCD was reasonable. I guess you could argue that “market ev” is the price H paid. My conclusion was it wasn’t unreasonable and I’m sure with some proper work, you’d get a range centred on the price paid.

 

In the case of Hornby itself, I’d be concerned that the illiquidity means that the quoted price isn’t really a market price. As ADB and Stationmaster observe, the price moves quite a lot for comparatively small purchases. The flaw in my taking an ebitda multiple approach is when an entity doesn’t have positive ebitda (as is the case for H). As I hinted above, for Hornby I think the only way to value it is to take an assumed business plan and present value it using DCF (I’d use a 10% plus discount rate even in this world of ultra low rates). I prefer to do such calculations (as I did for LCD) on an unlevered basis.

 

If I were writing a proper research report/pitch on Hornby, I’d take each of the common valuation methodologies and set them out in a set of ranges on a chart to triangulate value from a number of angles. I’d look at multiple based ev (with adjustments for associates etc) based on observed transaction multiples for peers), dcf based on a range having used capm to derive wacc (again with some peer evidence on beta/risk premium). I’d show the market figures probably using high/low ranges of the share price, eps type multiples based on peers etc etc.

 

Ultimately valuation is an art masquerading as a science.

 

David

[BWsTrains]

Ultimately valuation is an art masquerading as a science.

 

David

Hi David,

 

Fortunately I got my early retirement pack before anyone rumbled that important distinction  

 

The biggest problem is of course "garbage in, garbage out" and in my whole time I never saw a business forecast from the commercial guys based on any substantive input! They used only what they figured they could sneak past the MD to secure their bonuses, "cynical me?"

 

Colin

[Clearwater]

Hi David,

 

Fortunately I got my early retirement pack before anyone rumbled that important distinction

 

The biggest problem is of course "garbage in, garbage out" and in my whole time I never saw a business forecast from the commercial guys based on any substantive input! They used only what they figured they could sneak past the MD to secure their bonuses, "cynical me?"

 

Colin

I remember early in my career a senior MBO banker telling me that he’d never seen a business plan from a client that didn’t show growth at double rpi. His non- technical answer was that it couldn’t possibly be the case that all businesses could grow at such a rate without doubling inflation...

 

David

[adb968008]

I remember early in my career a senior MBO banker telling me that he’d never seen a business plan from a client that didn’t show growth at double rpi. His non- technical answer was that it couldn’t possibly be the case that all businesses could grow at such a rate without doubling inflation...

David

But would he lend to someone predicting growth that was half the RPI ?

Risk is risk, if your taking it, you’ve got to be optimistic of success, otherwise what’s the point ?

[tetsudofan]

Slightly   but regarding the Chinese and their respect for contractual obligations reminds me of the time I was living in Hong Kong from 1966 to 1968 at the height of the Red Guard activity in China.

 

Hong Kong at that time had a contract with China to supply water for nine months in the year (October to June) relying on the rainy season (July to September) to provide adequate rain water.

 

In 1967 the rainy season was not rainy and Hong Kong nearly ran out of water, in fact we ended up getting 4 hours water every 4 days!! In view of the problems within China and the supportive rioting in Hong Kong (when I was mobilised as an Auxiliary Police Constable in the Marine Division of the Hong Kong Auxiliary Police Force) everybody was getting a bit scared about what would happen on October 1st. Hong Kong would have dried up if they didn't water!

 

October 1st came and, despite all the problems within China,the Chinese turned on the tap and water was flowing into Hong Kong. There was a contract.....and they kept to the contract.

 

Keith

[adb968008]

Water was really the only reason why 1997 needed to happen. China was holding the water card. Without the new territories, there wouldn’t be enough water, and China wasn’t for renegotiating the lease.

 

I miss HK, but it’s changing fast., very fast.

[maico]

On 20/06/2018 at 13:40, Legend said:

 

Olympic Tat and if you remember correctly there was starvation of models as Sanda Kan imploded. So they had nothing to sell and because they had no manufacturing strategy other than buying from Sanda Kan they had to scurry around for other manufacturers. 

 

In the 2014 company report, still available on the Hornby PLC site, they list their suppliers in China as Zindart, Refined and Talent. In India Microplastics and at least 1 UK supplier. So, they are trying to diversify suppliers.

 

Mind you, the Austrian company Roco-Fleischmann who operate at some of the same price points, lost 15 million euros in 2015-16 on a turnover of 49 million euros despite opening an additional low cost production base in Vietnam.

 

Marklin-Trix did better. Metal trains made in Germany and their own factory in Hungary. The plastic hobby range and toys sourced from the far east. They made a small profit over the same period of 3.3 million euro on a turnover of 94 million euros (83 m GBP)