January Trading Statement

[CUCKOO LINE]

Just spotted Hornby issued a trading statement back on Jan 20th

Hornby Plc ("Hornby" or "the Group")

Trading Update

Hornby Plc, the international models and collectibles Group, is today updating shareholders on trading for the period from 1 October 2020 to date, which includes the important Christmas and New Year period.

Business Performance 

Group sales for the third quarter were positive and ahead of the same period last year. As a result, cumulative group sales for the financial year to date are ahead of last year. This has been driven by a hugely popular product range and increased global demand as consumers spend more time indoors focusing on their hobbies and taking comfort from our brands.

January to date has been a slower start that we would have liked as we contend with tighter COVID-19 restrictions within the warehouse and the impact of courier companies pausing collections bound for Europe due to Brexit backlogs. We have now largely worked through these issues and will start shipping to Europe imminently.

Covid-19

In the short term we have had to make repeated changes and adaptations to protect our supply chain, to ensure that we will be stronger after Covid-19 than we were before it.  Our sales performance currently bears this out; throughout this difficult period most of our wonderful staff have had to adapt by working from home or restricting their activities in other ways, but they still achieved higher sales than in the prior year, pre-Covid. We need to continue this hard work so as to earn our customers' continued loyalty.

We have to accept that the previously established retail environment has changed forever, due to the pandemic. We continue to adapt to this new situation and the challenges it presents. Our responses, and the changes we have made, have given us a stronger bond with our customers.  Our direct sales are up 133% year on year.

Financial Position

Covid-19 has had dire consequences for many businesses, but we have coped with it. We will be in a much better position to advance still further, once the pandemic is over. 

Net cash at the end of December 2020 was £3.8 million compared to net cash £3.9 million at the end of September 2020 and net debt £9.9 million at December 2019.

 

 

Product Range 2021

We would normally be attending several Toy Fairs during January but these have been cancelled due to COVID restrictions. As such we have digitally previewed our latest range announcements which have been released to the trade and the public through various social media platforms. The feedback was encouraging, and we were buoyed by the levels of interest.  

Outlook

We currently expect to finish the year with sales 15-20% ahead of the prior year subject to the warehouse still being able to operate fully with new COVID restrictions in place. 

Our new website is expected to go live in the coming weeks and we anticipate a much improved interaction with our much loved customers as the platform allows us to continually develop the communities we serve. 

Hornby will announce its preliminary results for the year ended 31 March 2021 in June.

Chief Executive Officer, Lyndon Davies commented:

No one expected the last year to turn out as it did. It is hard, however, not to want to spread a little 'good news' amongst all the bad. The transformation at Hornby continues to accelerate, this is not time for braking, we must now accelerate upwards through the gears.

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014 as amended by The Market Abuse (Amendment) (EU Exit) Regulations 2019.

-ends-

 

[Nova Scotian]

That's a good update for Hornby - if they can retain the momentum and "loyalty" from customers returning to, or spending more time on, the hobby as/when COVID-19 eases they'll be in a much stronger position than they have been for many years.

 

The numbers involved for Hornby are slightly boggling in how... small... they are. Like, we all expect them to act like a sophisticated multinational with thousands of employees, and while they're one of the biggest in the hobby they really are small/scrappy compared to where I think customer expectations are.

 

The new kids range looks good, the revived Dublo range looks as though it'll be a helpful margin boost. I think they could pull of the comeback required. Hopefully they're very carefully thinking about what they do to better serve the "modern image" modeller so they can further grow and get themselves well positioned for the future.

[Michael Hodgson]

"a stronger bond with our customers"

"Our new website is expected to go live in the coming weeks and we anticipate a much improved interaction with our much loved customers as the platform allows us to continually develop the communities we serve. "

... and direct sales more than doubled.

 

Does this presage a trend to cutting more retailers out of the loop permanently ... including of course the discounters ?

[Nova Scotian]

19 minutes ago, Michael Hodgson said:

"a stronger bond with our customers"

"Our new website is expected to go live in the coming weeks and we anticipate a much improved interaction with our much loved customers as the platform allows us to continually develop the communities we serve. "

... and direct sales more than doubled.

 

Does this presage a trend to cutting more retailers out of the loop permanently ... including of course the discounters ?

That's what I would take away from it.

 

The retailers this year have mostly had to operate online online, so direct-selling versus retailer at that point just eats margin for Hornby. At the same time the retailers have been moving into their space (designing, commissioning, marketing and distributing product), so it's not really a move "against" the retailers, as the retailers can be seen as the ones on the offensive. The usual sales channels have been creaking and groaning the last decade, COVID-19 accelerated them (there are some good studies out there on the acceleration of e-commerce, direct sales etc) and I think they expectation is that things won't go back to the way they were.

[truffy]

21 hours ago, CUCKOO LINE said:

Our new website is expected to go live in the coming weeks and we anticipate a much improved interaction with our much loved customers as the platform allows us to continually develop the communities we serve. 

FACEPALM!

[The Stationmaster]

Very interesting comments in that report - financial position undeniably, and very obviously, good but the share price fell c.20% in the week following the statement and is still more than 10% lower than its pre-statement level.  But it's still almost 50% higher than it was a year ago so not entirely gloomy.  But I wonder if what are stated to be 'distribution problems' are being taken as a warning by some shareholders?  

 

Even more interestingly the delayed arrival of various 2020 models is not mentioned which suggests that Hornby have high hopes of them being here, and distributed, before their financial year end which will add a very positive note to their final results.  I hope for their sake that those deliveries do arrive and are distributed in time.

 

What is also interesting is that there is no sign of any sort of Lockdown 2 or 3 bounce being reported after the big bounce they got from Lockdown 1.  Is this an indication of the way the market has reacted in the more recent lockdowns or is it again related to supply availability - which obviously was beginning to encounter log jams in December?  I must admit to finding it a little odd that Covid 19 restrictions in the warehouse are a more recent issue when in workplace areas very little has changed since the first lockdown and what immediately followed in its wake.

 

The very big elephant in the room for the entire model railway industry - right through from commissioned manufacture to distribution and retail levels - is the longer term effect of any economic downturn and job/income losses.  It is far from clear how this will impact the model railway world and I do wonder if the impact is now beginning to emerge hence what I see as a possible note of caution in the statement.   But having said that I would be amazed if Hornby do not finish their current financial year with sales income at least c.20%-25% up on the previous year.  It might be more if the delayed 2020 models arrive in time.   Lockdown looks like remaining in place for roughly another 2 months and in theory that should still be good for hobby activity sales - if Hornby can get stuff to its retailers and customers and provided potential customers still have the money to spend. 

[robmcg]

Interesting observations Mike, I might have commented on the statement yesterday but there are so many 'what ifs' in today's environment.  The warehousing limitations are interesting if they are at full capacity and there are lots of new models coming for direct Hornby on-line sales.

 

I get the feeling that Hornby are being more careful with quantities of production of new model engines at least, maybe they have more flexible factory systems, in any even the production runs for say an A2 variant must be very small. 

 

In general I feel that Hornby have a good culture and team-sense and have a lid on expenses, and I wish them well , especially given a brave and ambitious programme for 2021. 

 

p.s. the new website still crashes at the thought of doing anything but aimless browsing...

 

 

Edited February 3, 2021 by robmcg
typo

[JSpencer]

8 hours ago, The Stationmaster said:

What is also interesting is that there is no sign of any sort of Lockdown 2 or 3 bounce being reported after the big bounce they got from Lockdown 1.  Is this an indication of the way the market has reacted in the more recent lockdowns or is it again related to supply availability - which obviously was beginning to encounter log jams in December?  I must admit to finding it a little odd that Covid 19 restrictions in the warehouse are a more recent issue when in workplace areas very little has changed since the first lockdown and what immediately followed in its wake.

 

 

There seem to be two factors coming in here. In Lockdown 1, people had holiday money they could not spend, so any hobby that could be ordered online and be done at home did rather well. I mean, I saw people making leather armour from leather kits whom had never worked with leather before. So people joining hobby's became very popular. By lockdown 2/3, for some resourses were no longer there (furlows etc), while others, their energy for these new hobbies was beginning to wane. I saw people who were quite sporty in lockdown 1 dropping out of sports and going back to the TV. Maybe investing in streaming chanels which are cheaper than these hobbies and require no effort. 

How many newcomers are we going to retain, remains to be seen. Perso, I'd like to get out to shows again as discussing with like minded people what you've done/what they did is for more gratifying than likes on a social platform.

Its a bit frustrating having these crafted items that cannot go on display for others to enjoy.

 

The second factor are containers. Lots being stuck in ports etc. Causing container prices to go say from 2000$ to 10000$. It's not as efficient to move stuff around anymore. 

 

Your comments about the long term are indeed quite concerning. Threats from those new arrivals on the market and threats from the market not having as much revenue anymore. I have quite a heavy spending plan this year from items announced last year or before. But little spending plans on new items announced so far. And certainly I see very little of any of it dragging into 2022. But then my focus will probably shift to getting better accesories/extensions for the layout itself.

[adb968008]

On 02/02/2021 at 12:23, Michael Hodgson said:

"a stronger bond with our customers"

"Our new website is expected to go live in the coming weeks and we anticipate a much improved interaction with our much loved customers as the platform allows us to continually develop the communities we serve. "

... and direct sales more than doubled.

 

Does this presage a trend to cutting more retailers out of the loop permanently ... including of course the discounters ?

 

i was wondering this.

Obviously Hornby needs a high street presence. But it only needs a small but geographically dispersed high street, not a competing online presence with its own.

 

Their problem is the opposite of Accurascales, where they started online, built loyalty and now have competing retailers online with the same product.

 

And half way inbetween is Heljan, no online presence and widening their reach through several channels.

 

They are all at opposite sides of the same problem... the need to reach more, to sell more product and generate a return.

Hornby is the only one in General public ownership.

So the ultimate aim of Hornby (and any traded company) is to raise the share price.
At some point Hornbys largest shareholder is going to want to see a long term stable growth return, or an exit strategy that maximises the investment return.

 

Reducing high street, ceasing Hornby trade with 2 large reach customers and competing against retailers online is imho at odds with expanding reach through several channels.. but Hornby does need the high street.

So, exit strategy... If they wanted an exit, they need buyers of shares, perhaps getting retailers to become investment partners (as opposed to franchising) solves several issues... competing with yourself and too many others in the network, maintaining the high st presence and it offers a stable high share price whilst a large investor exits or reduces exposure ?

 

on a slight tangent, following retailer supply issues in 2020, this year is the first time in 4 years ive pre-ordered GA items from Hornbys website..I have to hope Hornby can reliably supply what their retailers havent been reliably able to... Am I, Mr Customer, being played as part of a strategy ?

 

Edited February 4, 2021 by adb968008

[Michael Hodgson]

Hornby PLC isn't just trains, they also include Corgi and Scalextric brands.  The company is majority owned by an asset management fund specialising in turnaround of companies with a history of financial problems..

 

I see their trains market as splitting into two main categories with very different characteristics.  Modellers, relatively limited in number, but who have already accepted they need to buy online where that is the only option and who are prepared to pay a premium price for accuracy in a high quality product, and children's toys with potentially much larger volume but where robustness and low price are key considerations and accuracy is fairly unimportant.  A visible presence in toyshops may still be necessary for sales to the latter group, but that doesn't  imply a need to carrry the whole product range.  If/when the public do take to buying most of their toys online, the problem becomes one of maintaining product awareness - that is, they need to advertise.

[CUCKOO LINE]

11 hours ago, adb968008 said:

 

 

So, exit strategy... If they wanted an exit, they need buyers of shares, perhaps getting retailers to become investment partners (as opposed to franchising) solves several issues... competing with yourself and too many others in the network, maintaining the high st presence and it offers a stable high share price whilst a large investor exits or reduces exposure ?

 

 

 

or give modellers/collectors  an incentive to buy shares ?

[Ighten]

Hornbys shares are relatively cheap though so you would need quite an amount for them to considerto offer an incentive - on the other side as an investment unless your holding a lot the % growth that shows is a little meaningless - I do use them on my ISA platform to scoop up any loose change from regular trades in my portfolio but even when they shoot up as they did your still only talking a relatively small monetary growth when you sell  ...  The opposite of this is that if you did sink a lot of money into just Hornby you would have to be very lucky or possess a crystal ball on when to sell - your money is sort of stuck in a non growth share as they dont pay out a dividend.

[Cor-onGRT4]

A week ago there was an article in The Guardian about hunderds of companies that are considering to set up a warehouse in the EU to avoid all the trouble of exporting to the EU, and serve their customers, they all have very much difficulties with exporting and some depending on 40% of their exports ,among them is Hornby they also considering to set up a warehouse overhere in the Netherlands. so they can do without any problem or extra cost for their customers do the sale to EU residents.

It seems to be very popular the Netherlands for those companies, because the many facilities it seems to have for buisnesses, IT, infrastructure and port Rotterdam.

Over 250 UK companies are listed by the Netherlands Foreing Investment Agency considering to  settle in the Netherlands

Edited February 4, 2021 by Cor-onGRT4

[Clearwater]

11 hours ago, adb968008 said:

SNIP

Hornby is the only one in General public ownership.

So the ultimate aim of Hornby (and any traded company) is to raise the share price.
At some point Hornbys largest shareholder is going to want to see a long term stable growth return, or an exit strategy that maximises the investment return.

So, exit strategy... If they wanted an exit, they need buyers of shares, perhaps getting retailers to become investment partners (as opposed to franchising) solves several issues... competing with yourself and too many others in the network, maintaining the high st presence and it offers a stable high share price whilst a large investor exits or reduces exposure ?

 

 

25 minutes ago, Ighten said:

Hornbys shares are relatively cheap though so you would need quite an amount for them to considerto offer an incentive - on the other side as an investment unless your holding a lot the % growth that shows is a little meaningless - I do use them on my ISA platform to scoop up any loose change from regular trades in my portfolio but even when they shoot up as they did your still only talking a relatively small monetary growth when you sell  ...  The opposite of this is that if you did sink a lot of money into just Hornby you would have to be very lucky or possess a crystal ball on when to sell - your money is sort of stuck in a non growth share as they dont pay out a dividend.

In my view, seeking to get retailers to be investment partners would be an absolute nightmare within the confines of an entity with a rump listed stake.  Bearing in mind the sums involved, even at the current share price would, I expect, be way above what any retailer would wish to invest.  Unless they have 10s of millions.  Which I doubt.  Even if the did have the cash, a shareholder agreement would be required which would be problematic unless you're proposing a sale of listed shares that the retailer could later trade on the open market.  That would be an unusual structure, I'm not sure of any precedents, and would be challenging for all parties to agree a valuation.

 

Hornby's majority investor is a private equity fund.  They will want a clean exit either by a block sale of the shares through a broker to institutional investors or a sale of the stake to another fund.  They will be looking to maximise their sale proceeds which will mean that they want to show strong growth and in their sales memoranda they will seek to explain how that growth can be maintained.  

 

How are you defining Hornby's shares as cheap?  They don't have a full p/e earning ratio,  on the half year I make the ratio c200 (crude calculation taking 56p of current share price divided by 0.14*2)Games Workshop is c47, M&S 8.3) and EV/EBITDA  (again annualising the half year results looks to be c36x), I wouldn't view that as "cheap."

 

Stocks can be growth stocks without paying dividends.  If anything, slow and steady dividend payers like utilities, show lower share price growth rates.  A stock trades on the basis of the mix of dividend paid and hoped for share price growth ie you get part of your return through the share price.  It is, however, not unusual for companies to offer shareholder discounts to stock holders, say5-10% off. 

 

David

 

[Ravenser]

1 hour ago, Cor-onGRT4 said:

A week ago there was an article in The Guardian about hunderds of companies that are considering to set up a warehouse in the EU to avoid all the trouble of exporting to the EU, and serve their customers, they all have very much difficulties with exporting and some depending on 40% of their exports ,among them is Hornby they also considering to set up a warehouse overhere in the Netherlands. so they can do without any problem or extra cost for their customers do the sale to EU residents.

It seems to be very popular the Netherlands for those companies, because the many facilities it seems to have for buisnesses, IT, infrastructure and port Rotterdam.

Over 250 UK companies are listed by the Netherlands Foreing Investment Agency considering to  settle in the Netherlands

 

 

Hornby International owns the traditional main national ,model railway brands for France, Spain and Italy. Bringing those shipments into a Continental warehouse and distributing from there, rather than from Kent may well make a lot of sense , given they already do that  for other markets outside the EU. They also move substantial quantities of full containers, so bringing complete containers into a warehouse on the North Continent  would not be disruptive of their logistics

 

It's misleading to suggest that dispatches from a Dutch warehouse to Spain will not be subject to VAT whereas dispatches from the UK will. In both cases VAT will be applied, and after 1/7/21  in both cases it will be Spanish VAT. Similarly the import duty on model railway items is nil, so no savings for anyone there.

 

The attraction of the Netherlands for distribution is simply that the 4 main North Continental container ports are Antwerp, Rotterdam, Bremerhaven and Hamburg (with Bremerhaven very much an also-ran in that list.) In practice the Netherlands is mainly competing with Belgium for the warehouse work

 

So a small amount of warehousing and distribution work is transferred from Britain to the Netherlands, at a time when Hornby admit their warehouse in Britain is under some pressure - probably because it is dispatching small shipments to lots of retail customers rather than larger deliveries to fulfil model shop orders. Whether we like it or not, the implication of lockdown is that people will not be buying from shops which are closed, and will be buying directly from the website.

 

That logic applies equally on the Continent, and Hornby may well be looking much more to direct sales online within the EU market in future, rather than through bricks and motor retail distribution. If so, a second warehouse/fulfilment centre on the Continent  makes obvious sense.

 

Clearly we are only talking about a small fraction of Hornby's overall business activity (ie dispatch of models from the warehouse, to Continental buyers ). The same will apply to the other companies reported to be looking at setting up operations in the EU - they are not moving their core operations, merely a modest proportion of their warehouse dispatch work.

 

Some general considerations on this:

 

1. Britain has been said to have not enough people to do all the jobs in the economy, resulting in a claimed need to import several hundred thousand extra people each and every year. Warehouse jobs are not highly-paid work, and most staff in British warehouses, at least in the South East, are Eastern Europeans . Is it really worth Britain continuing to import people so we can hang onto low value low-wage work sending out courier packets to the EU ?

 

2. Britain has much less warehouse space per head of population than pretty well anywhere else in Europe. By Continental standards we are substantially short of warehouse and distribution space. It's not like we are going to be left with tracts of abandoned warehouses if  some people move their EU dispatch

 

3. This all cuts both ways, and no doubt some companies on the Continent will equally find it convenient to move their stock-holding and dispatch to British clients into a warehouse in Britain. Probably the larger operations, but there will certainly be work moving the other way (I have come across one minor example of that personally)

 

At a more practical level - will this move affect availability of Hornby International brands in the UK via the Hornby website? Given that most orders of Continental RTR are likely to exceed £135 value..

 

I would have imagined that it would be possible for Hornby International (VAT reg in the EU) to sell the item to Hornby UK on FCA terms as a piece of in-house accounting, meaning Hornby International are the shipper, supplier and responsible for any export customs declarations, Hornby UK are the consignee and UK importer, and therefore liable to HMRC for the VAT, and Hornby UK sell to the British buyer at a RRP inclusive UK VAT. The final buyer then appears as place of delivery/Notify Party

 

Therefore I can't see any reason why Hornby International HO and N wouldn't continue to be available in  Britain via the Hornby website.

 

 

[Michael Hodgson]

2 hours ago, Cor-onGRT4 said:

A week ago there was an article in The Guardian about hunderds of companies that are considering to set up a warehouse in the EU to avoid all the trouble of exporting to the EU, and serve their customers, they all have very much difficulties with exporting and some depending on 40% of their exports ,among them is Hornby they also considering to set up a warehouse overhere in the Netherlands. so they can do without any problem or extra cost for their customers do the sale to EU residents

 

One big warehouse?  Or a lot of brass plates?

[Clearwater]

10 minutes ago, Michael Hodgson said:

One big warehouse?  Or a lot of brass plates?

 

Physical warehouse as @Ravenser explains.  Chances are the containers they import in will be on a ship going to Rotterdam anyway so taking them off the ship and palletising in Rotterdam as opposed to Margate may make sense anyway.  I'd expect that the warehouses mentioned would likely be 'customs warehouses' such that the goods technically hadn't entered the EU in any event.  That way the importer would only pay VAT/duty when the goods leaves for distribution to retail.

[Ravenser]

1 minute ago, Clearwater said:

 

Physical warehouse as @Ravenser explains.  Chances are the containers they import in will be on a ship going to Rotterdam anyway so taking them off the ship and palletising in Rotterdam as opposed to Margate may make sense anyway.  I'd expect that the warehouses mentioned would likely be 'customs warehouses' such that the goods technically hadn't entered the EU in any event.  That way the importer would only pay VAT/duty when the goods leaves for distribution to retail.

And if the ship doesn't go to Rotterdam, it will call Antwerp instead

 

The only logistics impact is that you have to make up separate containerloads for Britain and the Netherlands

 

If you need more warehouse space anyway, this is an easier option than moving your British warehouse to somewhere bigger in Kent

[Clearwater]

Just now, Ravenser said:

And if the ship doesn't go to Rotterdam, it will call Antwerp instead

 

The only logistics impact is that you have to make up separate containerloads for Britain and the Netherlands

 

If you need more warehouse space anyway, this is an easier option than moving your British warehouse to somewhere bigger in Kent

 

Yes, apols I was using Rotterdam as shorthand for big container ports.  Whilst I don't know, I'd be surprised if their loads were big enough for multiple containers of the same product.  Intuitively, I'd expect them to fill containers with product at factory and break them down at a single warehouse rather than asking the source factory to pack different containers for different locations.  Latter sounds to have more scope for error that everything arriving in Europe to be sorted out.  Particularly if they're using multiple factories.  Plenty of options to devan and then send pallets over to the UK on the RoRo services.  Might suggest that Margate isn't an ideal location for a UK logistics operation fed from the Netherlands/Belgium.  Barwell is a much more logical place to base yourself!

[Ravenser]

1 minute ago, Clearwater said:

 

Yes, apols I was using Rotterdam as shorthand for big container ports.  Whilst I don't know, I'd be surprised if their loads were big enough for multiple containers of the same product.  Intuitively, I'd expect them to fill containers with product at factory and break them down at a single warehouse rather than asking the source factory to pack different containers for different locations.  Latter sounds to have more scope for error that everything arriving in Europe to be sorted out.  Particularly if they're using multiple factories.  Plenty of options to devan and then send pallets over to the UK on the RoRo services.  Might suggest that Margate isn't an ideal location for a UK logistics operation fed from the Netherlands/Belgium.  Barwell is a much more logical place to base yourself!

 

 

At 300-400 /40's per annum , I'd expect them to break into two streams. That's 6-8 containers a week, so should be manageable. You will not strip a box in Kent then redispatch cargo to the Continent. Just send 1-2 containers /week directly into Antwerp/Rotterdam . And containers are far more secure 

 

The bulk of the volume will be into the UK - just put the Hornby International stuff into the Netherlands.  Segregation by brand. I certainly don't expect them to truck their British shipments across the Channel....

[Ighten]

2 hours ago, Clearwater said:

 

 

 

How are you defining Hornby's shares as cheap?  They don't have a full p/e earning ratio,  on the half year I make the ratio c200 (crude calculation taking 56p of current share price divided by 0.14*2)Games Workshop is c47, M&S 8.3) and EV/EBITDA  (again annualising the half year results looks to be c36x), I wouldn't view that as "cheap."

 

Stocks can be growth stocks without paying dividends.  If anything, slow and steady dividend payers like utilities, show lower share price growth rates.  A stock trades on the basis of the mix of dividend paid and hoped for share price growth ie you get part of your return through the share price.  It is, however, not unusual for companies to offer shareholder discounts to stock holders, say5-10% off. 

 

David

 

Sprry slight misterm - I dont mean cheap as in value Im simply referring to this idea that people (and some popular newspapers) see them as just a few pence to fritter a way (in cost per share - the idea of I can have a piece of that and take advantage)  rather than a few £ and they should see something in return for any ownership - If you look at the daily trading volume its quite suprising how many trades are done..

 

Im not sure Hornby since 2012 have ever offered a dividend or are even considering one this time - though they are just about to offer a long term incentive plan 

[Clearwater]

6 minutes ago, Ighten said:

Sprry slight misterm - I dont mean cheap as in value Im simply referring to this idea that people (and some popular newspapers) see them as just a few pence to fritter a way (in cost per share - the idea of I can have a piece of that and take advantage)  rather than a few £ and they should see something in return for any ownership - If you look at the daily trading volume its quite suprising how many trades are done..

 

Im not sure Hornby since 2012 have ever offered a dividend or are even considering one this time - though they are just about to offer a long term incentive plan 

 

Understood.  Yes, they're a very thinly traded micro cap stock.  Hence the volatility you see whenever there is a material order or piece of news.  

 

I'd reckon a couple of years or so before a dividend until they feel their balance sheet is stronger.  Typically, PE don't pay dividends and focus more on capital growth.  If they could reinvest to take Hornby's EBITDA from say £5 to £10m, then they may be more likely to look more at doing that than paying the cash out to shareholders and make their return on exit.

 

[Mike Storey]

1 hour ago, Clearwater said:

 

I'd reckon a couple of years or so before a dividend until they feel their balance sheet is stronger.  Typically, PE don't pay dividends and focus more on capital growth.  If they could reinvest to take Hornby's EBITDA from say £5 to £10m, then they may be more likely to look more at doing that than paying the cash out to shareholders and make their return on exit.

 

 

They are not even close to that lower figure yet. The latest trading statement (after the initial optimism of the half-year statement) suggests that growth has not been as spectacular as originally expected, in the Christmas run-up and certainly afterwards. There has been seismic growth, for sure, but virtually all of that was wiped out by their finance costs, despite not having used all of their credit. So, whilst the trend looks far more promising, the growth rate is still volatile.

[Clearwater]

2 hours ago, Mike Storey said:

 

They are not even close to that lower figure yet. The latest trading statement (after the initial optimism of the half-year statement) suggests that growth has not been as spectacular as originally expected, in the Christmas run-up and certainly afterwards. There has been seismic growth, for sure, but virtually all of that was wiped out by their finance costs, despite not having used all of their credit. So, whilst the trend looks far more promising, the growth rate is still volatile.

 

Hi Mike

 

When looking at valuation, financiers typically look at cash generation usually taking EBITDA (Earnings before Interest, tax, depreciation and amortisation) as a close proxy.  As EBITDA isn't usually disclosed in accounts, its a bit of an art form to get back to a figure.  As a quick and dirty, you can can statutory operating profit and add back for depreciation.  (not perfect but good enough for a fraction of the effort).  I agree their finance package is expensive but as I mentioned a couple of years ago, they were in the last chance saloon and had little choice but to take such a package.  The implicit assumption in the EBITDA based analysis is that once profit stabilised, the expensive finance package is refinanced back towards a cheaper and more flexible RCF , probably from one of the UK clearers.  Not using the credit lines is a good thing here- suggests that the business is generating enough cash to pay its way.

 

• Taking the most recent financial results for the half-year to 30/9/20, Operating Profit f was £163k which is pre-finance charges.  They generally trade better in H2 for Christmas etc but cautiously lets annualise by doubling to £325k. By comparison, in the year to 2020, approx 42% of the revenue was earned in H1 and a similar proportion of the gross profit.
• Depreciation charge for 12m to 31/3/2020 was £2.1m. 6m to 30/9/2020 was £870k so slightly lower.
• Adding back to give EBITDA shows H1 21 as being £1m so annualised call it £2m, possibly slightly more depending on your view on seasonality (see below).

Cash generation is H1 was reported as £1.7m (p12 of the interims) so roughly the same as my crude calculation above.  Both pre financing and pre capex (arguably a discretionary figure...).

 

As such, I don't think they are far away from achieving £5m EBITDA.  Gross margin in H1 2021 is 2% higher than in 2020 full year (46.6% vs 44.1%)  and  6% better than H1 2020 (40.9%).  On £50m of sales, that alone equates to an extra £1.1-3m of gross profit.  The worry for me is that they plateau at say £5m EBITDA which then suggests a toppy multiple for the type of business they are to their market capitalisation.

 

A full valuation would start with EBITDA, take an assumption based on advice, of an appropriate debt structure, see what capex is required to sustain the revenue line and then discount the remaining free cash flow to get a valuation.  Model would show 5 years and make an assumption on value at the end of year 5 (Terminal Value).  Different ways of calculating that so I'd take a spread of options.  Discount rate for the equity would be pretty high, risk free plus 5-10%.  Again I'd show a spread.

 

Agree there growth rate is volatile.  They need to show sustained profitability for a couple of years without the overhead, capex and financing costs swallowing any cash flow the sales generate.

 

David

[JSpencer]

9 hours ago, Cor-onGRT4 said:

A week ago there was an article in The Guardian about hunderds of companies that are considering to set up a warehouse in the EU to avoid all the trouble of exporting to the EU, and serve their customers, they all have very much difficulties with exporting and some depending on 40% of their exports ,among them is Hornby they also considering to set up a warehouse overhere in the Netherlands. so they can do without any problem or extra cost for their customers do the sale to EU residents.

It seems to be very popular the Netherlands for those companies, because the many facilities it seems to have for buisnesses, IT, infrastructure and port Rotterdam.

Over 250 UK companies are listed by the Netherlands Foreing Investment Agency considering to  settle in the Netherlands

 

The question is though will they split UK outline between the two warehouses or just ship UK outline to the UK and EU outline just to the EU? The former could be done, but probably needs firm orders from EU shops to do it (on UK shops on Hornby's international range). Otherwise its guess work on how many UK outline models they will sell in the EU and small numbers hanging around in NL for years on end is not a viable stock holding proposition.