Hornby's financial updates to the Stock Market

[Mel_H]

I note that Bachmann doesn't have this problem. They have a shareholder (Kader) who appoint a management team and let them get on with producing high quality products that the modeller wants, and a sufficiently broad product line to cater for a range of budgets.

Dare I say while Bachmann is obviously a business, it is not run on the basis of short-term returns. Hornby take note...

This is true of all businesses.

 

Shareholders (in it for the long term) provide capital for investment, and the return on their investment is (usually) dividends.

 

It works because dividend payments, in theory, are higher than if you'd invested the money elsewhere (e.g. bonds or banks). The rub is that the risks (e.g. you might not get a big enough dividend, or at worse lose all your cash) are higher. It's risk v rewards.

 

With a private company - like Kader - its main routes for investment are either cash from retained profits, bank borrowing (can be expensive and requires some sort of guarantee), or tapping the shareholders.

 

However, what happens in terms of financial and other strategies can easily remain behind the scenes and little is published in public.

 

Moving from a private to a public company (PLC) means you can in theory quickly raise more cash, and more cheaply, by giving investors a return (dividend) and a stake in the company.

 

If the company's net worth grows quickly as a result of that investment, you can then sell your share in the company to someone else for a high price than you paid and 'take profits' - which is how publicly-traded shares on the Stock Exchange often work.

 

The snag is that the shareholders in a company (through their votes) also have a say in how the company is run.

 

Within Kader (private), the shareholders are 'controlled' as only those invited to invest in the company can 'join the club'. In a PLC (public) then anyone can buy shares, irrespective of whether the founders, directors or other shareholders like them (or agree with them).

 

It's just two different means to achieve the same ends: i.e. raising cash and rewarding those who put money in.

 

The bald numbers are that Hornby's market capitalisation is currently £27.5m (roughly what it's worth if you wanted to buy it outright). It hasn't made a pre-tax profit since year-ending 31/3/12 (7% margin), and hasn't paid a dividend since then either. Although it's share price held okay (based on the PLC's statements), it crashed from 81p to 31p 'overnight' in February 2016 when traders took flight after Hornby posted a poorly-received trading update.

 

Comparing the two firm's most-recent figures:

 

Hornby: Year-ending 31/3/16 - turnover £56m, pre-tax loss £14m (-23% margin), net assets £32m. Remember that this includes non-railway stuff, like Scalextrics 

 

Bachmann Europe: Year-ending 21/12/15 - turnover £15m, pre-tax profit £0.25m (1.6% margin), net assets £10.6m, net worth £10m. No dividends were paid to Kader and the retained profit was £209,000. All these numbers were very similar in the previous two years - in other words it's flatlined and there's no real growth. On the other hand debt is low, however cash appears to be relatively tight for investment, which might partly explain why numerous promised new models have yet to arrive, other than joint ventures (where presumably a third party is putting money in towards tooling etc; even if that's merely a guarantee in terms of a large order rather than up-front payment). 

 

As for Dapol: It's so small that it does not have to file full accounts (and chooses not to), so its turnover, profit and other figures are kept secret. Publicly-available figures show its net worth is £1.5m. Its sole owner is Craig Boyle.

 

Overall, I'm as keen as anyone to see that they all thrive (and survive) so that we can continue to enjoy our hobby.

 

Currently all are producing good new models that the market seems to like, while being realistic about the headwinds from China and currency issues that is putting pressure on retail prices.

 

More power to their collective elbows!

Edited May 11, 2017 by Mel_H

[Mel_H]

There is of course one very important distinction.

 

Bachmann Europe PLC is an entity that is wholly owned by Kader Holdings - a privately held Hong Kong Company. Hornby PLC is a publicly owned company listed on the AIM. The demands of the different shareholders greatly impact executive decision making in each company.

 

In their requirement to serve different masters, we see different behaviours:

1. Pricing - Bachmann prices increased dramatically (with great apoplexy here) to maintain their profitability. This was done with great deliberation by Bachmann Europe and, I thought, was excellently communicated. Hornby tried to maintain pricing that was attractive to their core market in the UK. For this they were highly praised here, but the results were insufficient.
2. New product introduction - Bachmann introduced a (defacto, if not deliberate) dramatic slow-down in their production of new items. We've never really known exactly why this happened. Perhaps it was connected to shuttering factories and industrial action in China. Perhaps it was related to not having enough experienced staff to develop and build tooling, or perhaps it was due to fewer design slots with competing Kader brands, but it resulted in a slow-down all the same (with great apoplexy here). In the same period, Hornby ramped up aggressively with new product introduction, but the results were not there to sustain that effort and they have now essentially matched Bachmann with a slow-down in new product introduction.

I can't fault Hornby PLC for attempting to deliver value to their shareholders as quickly as possible. They are legally obliged to do so. (We here can, and have, discussed ad nauseum whether their approaches were prudent.)  In the last year or so they have attempted to reduce losses by not attempting to do too much at once, which is essentially what Bachmann has been doing for a while now.

 

Frankly I think they (and ultimately we) would be far better off with them as a privately held company, but that's just my opinion.

 

Sadly most of the employee buy-outs that I have seen are funded by equity companies (hedge-funds) who saddle the private company with debt that was used to fund the buy-out. That's not going to help Hornby.

Very well put, and much better than my ramble...!

Edited May 11, 2017 by Mel_H

[it's-er]

Many thanks to Mel_H for post 2735 above.

 

I've often wondered about the respective sizes of Hornby and Bachmann Europe, and I've not seen this comparison before. It is most interesting. As Mel says, the Hornby figures includes non railway products, but do the the Bachmann Europe figures include Lilliput and continental narrow gauge, or are they just Bachmann Branchline and Graham Farish?

 

Either way, Bachmann Europe's profit is pretty slim.

 

John Storey

[Roy Langridge]

Many thanks to Mel_H for post 2735 above.

 

I've often wondered about the respective sizes of Hornby and Bachmann Europe, and I've not seen this comparison before. It is most interesting. As Mel says, the Hornby figures includes non railway products, but do the the Bachmann Europe figures include Lilliput and continental narrow gauge, or are they just Bachmann Branchline and Graham Farish?

 

Either way, Bachmann Europe's profit is pretty slim.

 

John Storey

But isn't it hard to see the true picture for Bachmann? As it has a parent company from which it buys services, profits can be moved to the parent company quite easily distorting the profitability picture.

 

Roy

[Ozexpatriate]

Bachmann Europe: Year-ending 21/12/15 - turnover £15m, pre-tax profit £0.25m (1.6% margin), net assets £10.6m, net worth £10m. No dividends were paid to Kader and the retained profit was £209,000. All these numbers were very similar in the previous two years - in other words it's flatlined and there's no real growth. On the other hand debt is low, however cash appears to be relatively tight for investment, which might partly explain why numerous promised new models have yet to arrive, other than joint ventures (where presumably a third party is putting money in towards tooling etc; even if that's merely a guarantee in terms of a large order rather than up-front payment).

Kader Holdings' 2016 annual report is available.

 

For their model train business, for the financial year ended 31 December 2016, the revenue was approximately HK$702.68m, (US$90.21m or £69.99m) representing a decrease of approximately 16.89% as compared to last year.

 

The company was profitable, but less so than in 2015. The balance sheet is on page 46 of the link above.

 

Page 84 lists revenues from Europe (this would certainly include Liliput)

 

...................... 2015 ........ 2016 ...... change

HK$'000 .... 189,602 .... 159,059 .... (16.1%)

US$'000 ...... 24,341 ...... 20,420

    £'000 ....... 18,855 ...... 15,842

 

All Kader reporting is in HK$. I used today's conversion rates for the other currencies.

Edited May 12, 2017 by Ozexpatriate

[Legend]

This is true of all businesses.

 

Shareholders (in it for the long term) provide capital for investment, and the return on their investment is (usually) dividends.

 

It works because dividend payments, in theory, are higher than if you'd invested the money elsewhere (e.g. bonds or banks). The rub is that the risks (e.g. you might not get a big enough dividend, or at worse lose all your cash) are higher. It's risk v rewards.

 

With a private company - like Kader - its main routes for investment are either cash from retained profits, bank borrowing (can be expensive and requires some sort of guarantee), or tapping the shareholders.

 

However, what happens in terms of financial and other strategies can easily remain behind the scenes and little is published in public.

 

Moving from a private to a public company (PLC) means you can in theory quickly raise more cash, and more cheaply, by giving investors a return (dividend) and a stake in the company.

 

If the company's net worth grows quickly as a result of that investment, you can then sell your share in the company to someone else for a high price than you paid and 'take profits' - which is how publicly-traded shares on the Stock Exchange often work.

 

The snag is that the shareholders in a company (through their votes) also have a say in how the company is run.

 

Within Kader (private), the shareholders are 'controlled' as only those invited to invest in the company can 'join the club'. In a PLC (public) then anyone can buy shares, irrespective of whether the founders, directors or other shareholders like them (or agree with them).

 

It's just two different means to achieve the same ends: i.e. raising cash and rewarding those who put money in.

 

The bald numbers are that Hornby's market capitalisation is currently £27.5m (roughly what it's worth if you wanted to buy it outright). It hasn't made a pre-tax profit since year-ending 31/3/12 (7% margin), and hasn't paid a dividend since then either. Although it's share price held okay (based on the PLC's statements), it crashed from 81p to 31p 'overnight' in February 2016 when traders took flight after Hornby posted a poorly-received trading update.

 

Comparing the two firm's most-recent figures:

 

Hornby: Year-ending 31/3/16 - turnover £56m, pre-tax loss £14m (-23% margin), net assets £32m. Remember that this includes non-railway stuff, like Scalextrics

 

Bachmann Europe: Year-ending 21/12/15 - turnover £15m, pre-tax profit £0.25m (1.6% margin), net assets £10.6m, net worth £10m. No dividends were paid to Kader and the retained profit was £209,000. All these numbers were very similar in the previous two years - in other words it's flatlined and there's no real growth. On the other hand debt is low, however cash appears to be relatively tight for investment, which might partly explain why numerous promised new models have yet to arrive, other than joint ventures (where presumably a third party is putting money in towards tooling etc; even if that's merely a guarantee in terms of a large order rather than up-front payment).

 

As for Dapol: It's so small that it does not have to file full accounts (and chooses not to), so its turnover, profit and other figures are kept secret. Publicly-available figures show its net worth is £1.5m. Its sole owner is Craig Boyle.

 

Overall, I'm as keen as anyone to see that they all thrive (and survive) so that we can continue to enjoy our hobby.

 

Currently all are producing good new models that the market seems to like, while being realistic about the headwinds from China and currency issues that is putting pressure on retail prices.

 

More power to their collective elbows!

But as Roy points out in his post it is difficult to see the overall picture of Bachmann/ Kader . While only making 1.6% margin in Bachmann Europe they source all their models from Kader and you really don't know what margin/profit Kader makes on this and it isn't split out in Kader results.

 

There was a sea change now 4 years ago. As Oz points out Bachmann (probably Kader)upped price dramatically and really slowed production, while Hornby kept its prices relatively stable ,they had been more expensive than Bachmann up to this point,and over supplied. Clearly Hornby got it wrong on the supply and design clever, but maybe not on pricing. I'm not convinced Bachmann strategy was correct . The one thing it failed to recognise is I believe there is a ceiling beyond which most of the market won't pay. They will simply go elsewhere with the declining amount of disposable income they have .Declining per Bank of England this morning.

Edited May 12, 2017 by Legend

[Georgeconna]

But as Roy points out in his post it is difficult to see the overall picture of Bachmann/ Kader . While only making 1.6% margin in Bachmann Europe they source all their models from Kader and you really don't know what margin/profit Kader makes on this and it isn't split out in Kader results.

 

There was a sea change now 4 years ago. As Oz points out Bachmann (probably Kader)upped price dramatically and really slowed production, while Hornby kept its prices relatively stable ,they had been more expensive than Bachmann up to this point,and over supplied. Clearly Hornby got it wrong on the supply and design clever, but maybe not on pricing. I'm not convinced Bachmann strategy was correct . The one thing it failed to recognise is I believe there is a ceiling beyond which most of the market won't pay. They will simply go elsewhere with the declining amount of disposable income they have .Declining per Bank of England this morning.

 

That statement in itself says it all, Bachmanns pricing now for Wagons etc is top heavy, I now buy second hand when I can. €99.99 for 3 presflos as good as they are is a big price to pay when they were previously €15.00 a wagon. I don't mind paying Sensible prices but Balk a buying high priced wagons nowadays, Thankfully Oxford have stepped up to the plate with some nice wagons.

 

It will be interesting to see how the new pricing has effected Bachmann Sale over the past while.

 

cheers

 

George

[MarkSG]

But isn't it hard to see the true picture for Bachmann? As it has a parent company from which it buys services, profits can be moved to the parent company quite easily distorting the profitability picture.

 

Yes; and that's almost certainly why Bachmann pays no dividends to Kader, for example. As a wholly owned subsidiary, Bachmann only needs to make enough profit to keep itself in business. Anything more than that is a waste of money. So the overall margin is, in this context, rather meaningless. 

 

It's far more tax-efficent for a subsidiary to deliberately minimise profits and pass value to the parent by means of internal service, supply and licensing deals than it is to make a large profit and pay dividends on that profit. In some cases, it can even be beneficial to the parent for the subsidiary to make a loss on paper, although there's no suggestion that Kader is using that device with Bachmann.

 

A possibly more useful indicator of a company's financial health is to look at the assets, liabilities and net worth rather than profit. Comparing Hornby, Bachmann and Dapol is interesting in this respect:

 

Hornby http://companydb.uk/01547390-Hornby-plc

 

Bchmann http://companydb.uk/02392907-Bachmann-europe-plc

 

Dapol http://companydb.uk/01694602-Dapol-limited

 

(scroll down to "Financial Summary" on all of those)

[stewartingram]

As a simple Fentiger, I find it incredible that firms nowadays seem to look more at growth every year, than (to put it very simply) making an annual profit. I've never been fully in a business, but  have had various ventures, and been brought up with "Fen Values", and running a profit annually has been more important than continual expansion. Big is not necessarily beautiful or better.

 

Stewart

[Coryton]

But as Roy points out in his post it is difficult to see the overall picture of Bachmann/ Kader . While only making 1.6% margin in Bachmann Europe they source all their models from Kader and you really don't know what margin/profit Kader makes on this and it isn't split out in Kader results.

 

There was a sea change now 4 years ago. As Oz points out Bachmann (probably Kader)upped price dramatically and really slowed production, while Hornby kept its prices relatively stable ,they had been more expensive than Bachmann up to this point,and over supplied. Clearly Hornby got it wrong on the supply and design clever, but maybe not on pricing. I'm not convinced Bachmann strategy was correct . The one thing it failed to recognise is I believe there is a ceiling beyond which most of the market won't pay. They will simply go elsewhere with the declining amount of disposable income they have .Declining per Bank of England this morning.

 

But some people will pay, and - unfortunately for some of us - if by significantly increasing prices they halve sales but make more than twice as much on each sale, they've come out on top. 

 

However, we live in a world in which Chinese factories are available to anybody with the money and if Bachmann are being greedy and putting up prices too far then it presumably leaves the field open for smaller companies to come in and undercut them significantly.

[G-BOAF]

That statement in itself says it all, Bachmanns pricing now for Wagons etc is top heavy, I now buy second hand when I can. €99.99 for 3 presflos as good as they are is a big price to pay when they were previously €15.00 a wagon. I don't mind paying Sensible prices but Balk a buying high priced wagons nowadays, Thankfully Oxford have stepped up to the plate with some nice wagons.

 

It will be interesting to see how the new pricing has effected Bachmann Sale over the past while.

 

cheers

 

George

Very O/T, but I still treasure my grey Presflo from the first batch, purchased for around £8.50 in c.2010. Even at the time it was a bargain given the wealth of seperate detail. I can fully understand the current prices given the product that you are getting.

[The Stationmaster]

But isn't it hard to see the true picture for Bachmann? As it has a parent company from which it buys services, profits can be moved to the parent company quite easily distorting the profitability picture.

 

Roy

 

Basically it's impossible to see the full picture for Bachmann although we can readily surmise some of what has taken place with its under-pricing in the UK market effectively being subsidised by Kader which in turn was in a loss making situation on its model railway and toy manufacturing parts of the business.  In no way was this wholly related to its Bachmann Europe subsidiary but no doubt it would highlight in any review the need to improve returns from its UK sales.  Hence what Bachmann were paying to Kader had to increase to actually provide profits and that meant the prices we pay became more realistic (i.e. higher).

 

More interesting is how Kader seem to have acquired between 2015 and 2016 a loan debt of £3.9 million - is this the one where they had a breach of their banking covenant I wonder (although it's impossible for me to tell - a financial expert can probably find it in the 2016 report).  Incidentally although Kader Holdings are controlled by Kenneth Ting - with over 58% of the shares its shares are traded and on offer to public investors but that appears to be mainly to satisfy the 25% requirement.

[MarkSG]

As a simple Fentiger, I find it incredible that firms nowadays seem to look more at growth every year, than (to put it very simply) making an annual profit. I've never been fully in a business, but  have had various ventures, and been brought up with "Fen Values", and running a profit annually has been more important than continual expansion. Big is not necessarily beautiful or better.

 

The short answer is that companies get taxed on profits, but not on growth. So provided the business is sustainable, it's better to reinvest surplus cash back into business expansion rather than take it as profit.

 

Growth also increases shareholder value, as the overall value of the company per share increases. Again, this is more tax-efficient for shareholders, particularly institutional ones, than taking the profits in dividends.

 

(It's a lot more complicated than that when you drill down into the detail. But the basic principle, that growth is desirable for both tax efficiency and shareholder value, is the main factor here). 

[Coryton]

More interesting is how Kader seem to have acquired between 2015 and 2016 a loan debt of £3.9 million - is this the one where they had a breach of their banking covenant I wonder (although it's impossible for me to tell - a financial expert can probably find it in the 2016 report).  Incidentally although Kader Holdings are controlled by Kenneth Ting - with over 58% of the shares its shares are traded and on offer to public investors but that appears to be mainly to satisfy the 25% requirement.

 

Wasn't it Hornby who breached their banking covenant? Or did Kader too?

[roythebus]

Having skimmed through this lengthy subject, it brings me back to a conversation I had with Charlie Skelton of the famous W&H shop at a Toy Fair in Earls Court in the late 1970s.

 

We were talking about Hornby producing new models, and comparing their output compared to the likes of say Roco. Charlie's point was that when Roco brings out a new European model, it will sell tens of thousands all over the world because there are modellers and collectors of things in HO scale. For instance a model of a Belgian loco could be seen in Holland, France, Germany and Luxembourg so would sell 100,000. A typical British loco such as the class 47 would only be seen in Britain and would be bought by modellers with a production run of say 5,000. Collectors weren't interested as they collect things in HO scale as they were the wrong size.

[The Stationmaster]

Wasn't it Hornby who breached their banking covenant? Or did Kader too?

 

Kader's annual report say that wholly owned subsidiary had breached its banking covenants - it does not identify the subsidiary or which country it was in but a big sterling debt number appeared in the accounts compared with the previous year (but 2 + 2 doesn't necessarily give the correct answer as there could be other reasons for that number).

[jjb1970]

Having skimmed through this lengthy subject, it brings me back to a conversation I had with Charlie Skelton of the famous W&H shop at a Toy Fair in Earls Court in the late 1970s.

 

We were talking about Hornby producing new models, and comparing their output compared to the likes of say Roco. Charlie's point was that when Roco brings out a new European model, it will sell tens of thousands all over the world because there are modellers and collectors of things in HO scale. For instance a model of a Belgian loco could be seen in Holland, France, Germany and Luxembourg so would sell 100,000. A typical British loco such as the class 47 would only be seen in Britain and would be bought by modellers with a production run of say 5,000. Collectors weren't interested as they collect things in HO scale as they were the wrong size.

 

I'm not sure how true that is. European HO has a broader customer base than British OO for sure but production numbers for many HO releases don't seem that high and although modern Euro designs like the Siemens Vectron and Bombardier Traxx are seen all over Europe my personal experience is that most European modellers I know generally stick to a particular country with a bit of Rule 1 variation mixed in. Something that we tend to overlook in this country is that the European HO scene has gone through huge upheavals over the last 20 years with multiple bankruptcies and failures.

[Ozexpatriate]

Something that we tend to overlook in this country is that the European HO scene has gone through huge upheavals over the last 20 years with multiple bankruptcies and failures.

That sounds like the history of model railway companies in general - no less so in the century of British model railway toy companies - but I grant you that Marklin and LGB were two very big rocks thrown in the pond.

[Coryton]

. Something that we tend to overlook in this country is that the European HO scene has gone through huge upheavals over the last 20 years with multiple bankruptcies and failures.

 

Well yes and didn't quite a few of  them end up as brands owned by Hornby?

[jjb1970]

Well yes and didn't quite a few of  them end up as brands owned by Hornby?

 

Indeed, it is also rumoured that the International brands have been amongst the underperforming elements of the Hornby portfolio (although how true that is I don't know). As well as Marklin and LGB, and the brands Hornby picked up, Roco have been another high profile financial failure having gone bankrupt, been reborn and then ended up merging with Fleischmann.

[Coryton]

Indeed, it is also rumoured that the International brands have been amongst the underperforming elements of the Hornby portfolio (although how true that is I don't know). As well as Marklin and LGB, and the brands Hornby picked up, Roco have been another high profile financial failure having gone bankrupt, been reborn and then ended up merging with Fleischmann.

 

So I've read on a (mostly UK) forum.

 

I wonder what they are saying in other countries?

 

There seems to be a general attitude that people think Hornby's problems are all in a part of the company they aren't personally interested in and if they just got rid of it everything would be fine.

 

E.g. railway modellers blaming Airfix or Scalextric, Airfix and Scalextric fans blaming model trains etc...

[Stevelewis]

Indeed, it is also rumoured that the International brands have been amongst the underperforming elements of the Hornby portfolio (although how true that is I don't know). As well as Marklin and LGB, and the brands Hornby picked up, Roco have been another high profile financial failure having gone bankrupt, been reborn and then ended up merging with Fleischmann.

 

ROCO  and  Fleischmann  both   became  bankrupt,  both  now  trade  under  the  Modelleisenbahn GmbH  umbrella,  continuing  to use  their  individual  brand  names,  (and  still producing  very  High  Quality models in several  scales,  at  a  price!)

[jjb1970]

So I've read on a (mostly UK) forum.

 

I wonder what they are saying in other countries?

 

There seems to be a general attitude that people think Hornby's problems are all in a part of the company they aren't personally interested in and if they just got rid of it everything would be fine.

 

E.g. railway modellers blaming Airfix or Scalextric, Airfix and Scalextric fans blaming model trains etc...

I think the thing that gives the rumour credibility is the product programs of each range. The Hornby International ranges are treading water with a rather modest series of new items almost all of which is existing tooling. And it appears that they have pulled the plug on their US range. Airfix have also scaled back and have a rather modest new release program. Hornby OO on the other hand still has quite an ambitious program for a company losing money. You would reasonably expect limited funds to be directed to those areas of the business with the best performance which indicates that OO trains are performing better than some other parts of the business.

That said, as an enrhusiast of Italian HO a lot of my purchases have been from Rivarossi and Lima Expert over the last couple of years and I'd love to see a more ambitious program as their Italian models are superb.

[Bernard Lamb]

Hornby OO on the other hand still has quite an ambitious program for a company losing money.

As these models tend to have a long and expensive development period and that we are not privy to the position they are along that time/cost line, it might well be the most economic option to carry on. I don't think one can read anything into your comment either way.

Bernard

[jjb1970]

As these models tend to have a long and expensive development period and that we are not privy to the position they are along that time/cost line, it might well be the most economic option to carry on. I don't think one can read anything into your comment either way.

Bernard

True, but the cost and development time for their Arnold N and various HO brands will be similar and yet there aren't many new projects going ahead in those ranges. And the cost of developing a new Airfix kit won't be cheap although production costs should be relatively low. The new generation of Airfix kits are extremely well detailed.