Hornby Annual Results year ended 31 March 2018

[BWsTrains]

....

Australian prices are astronomical, I have seen  UK RRP priced £120 engines for sale on Amazon or from a 'large respected trusted retailer' for around AU$599 or £260.

equivalent.

 

We don't have the buyers to support a wide selection of stock, basically, for model engines and carriages at least.

Rob,

 

Sorry, rather tangential to main topic but relevant as to the health of the retail sector.

There are only 5 Hobby shops with a Railway focus in all of Melbourne for its nearly 5 million folk (in the wider catchment area of say 40km from CBD).

• Of these, one is far outer Eastern suburbs 33km from the CBD, probably has the (=) best Railway focus.
• One is CBD - Model railway represention is fair to declining but the staff member for rail (part time) is knowledgeable
• One has 2 branches - 1 CBD + 1 suburban but the city one currently is closed because (irony!) they're building a subway rail line right under the former premises.

  Model railway is also modest and apparently declining focus there, last time I went in the nominated railway guy wasn't even "au fait" with DCC! Mostly RC models, drones even rocketry are the hot sellers

• The final store is remote from me but seems from Website to be well stocked for rail items.

Prices are high for precisely the reasons you list regarding physical stock and supply chain, but this is a problem faced by many retailers opposite the online threat. Addition here of GST (10%) to direct imports from next week is no deterrent when prices are usually 100+% higher locally with less choice / availability.

 

Colin

Edited June 24, 2018 by BWsTrains

[robmcg]

...

 

 

Prices are high for precisely the reasons you list regarding physical stock and supply chain, but this is a problem faced by many retailers opposite the online threat. Addition here of GST (10%) to direct imports from next week is no deterrent when prices are usually 100+% higher locally with less choice / availability.

 

Colin

 

 

Thanks, good point, and again tangentially, I don't know how the Aus government can levy o'seas sellers such as ALL UK sellers  10% tax on 'private' imports to Aus, but I presume they will try to 'make' the larger ones comply.      It is another whole subject, certainly.   NZ retailers want to tax imports too but it's hard to see the costs of forcing compliance equalling the returns, regardless of 'fairness'..  Short of opening and valuing every package coming into the country. Often for a $10 tax....?   Unless they charge the customer for the cost of levying the tax....   as they do here in NZ for items over a declared $400 (cUKP200) typically $80-100 extra on top of the 12.5% goods and services tax.  It will be interesting to see how the Aus numbers stack up, cost of levying a tax vs return.

 

Regards,

Edited June 24, 2018 by robmcg

[Clearwater]

I think it said somewhere in early reports that PNC would be a senior debtor (although it didn't make it clear if that also meant  senior to Phoenix). 

 

.[/i]

My interpretation is that PNC is the senior creditor and senior to Phoenix and hence get preferential treatment, eg on enforcement. Not least that the PNC facility has a margin that is 2% lower (as a slight technical point, we're ignoring the amortisation of fees and utilisation fees and the shorter tenor of the Phoenix loan - given the longer you borrow for, the higher the rate so Phoenix's three year line would cost less than say a five year line. Inter alia, it also points to a three year turnaround plan..) . If they were at the same tier, borrowing costs would be similar.

 

David

[The Stationmaster]

My interpretation is that PNC is the senior creditor and senior to Phoenix and hence get preferential treatment, eg on enforcement. Not least that the PNC facility has a margin that is 2% lower (as a slight technical point, we're ignoring the amortisation of fees and utilisation fees and the shorter tenor of the Phoenix loan - given the longer you borrow for, the higher the rate so Phoenix's three year line would cost less than say a five year line. Inter alia, it also points to a three year turnaround plan..) . If they were at the same tier, borrowing costs would be similar.

 

David

 

Thanks David - I should have said debt holder (i.e. creditor) but it was getting late!!  It could get interesting if they can't pay off Phoenix and I can't really see Phoenix allowing PNC to get hold of the company's assets to its disadvantage - could get messy but surely Phoenix are too bright to let that happen?

[Clearwater]

Thanks David - I should have said debt holder (i.e. creditor) but it was getting late!! It could get interesting if they can't pay off Phoenix and I can't really see Phoenix allowing PNC to get hold of the company's assets to its disadvantage - could get messy but surely Phoenix are too bright to let that happen?

I think the purpose of the Phoenix line is to provide cash in the event that it looks like they’re going to breach the PNC covenants. To take an example, let say Hornby draw £5m under the PNC facility and forecast having £1.25m of ebitda to give a 4x debt/ebitda ratio which is comfortably inside a 5x debt/ebitda covenant (calculated as senior (ie pnc only) to Enid’s). However, if the business underperforms and only achieves £0.95m ebitda, the ratio would be >5x and possibly in default. However if sufficient of the Phoenix debt was drawn and used to pay down pnc, the senior ratio would fall back below the covenant level. Although the Phoenix debt may have some Covenants, they will likely be unable to enforce until pnc has decided what it is doing - the intercreditor will prevent them enforcing ahead of pnc (if I was pnc that’s the position I would seek). Effectively, the Phoenix line is flexible equity and avoids the need for a rights issue - again a reason why Hornby should not really be listed as its financial flexibility is constrained.

 

David

[robmcg]

It does rather look like LN has created a very good position from which to attempt the resurrection of Hornby.

 

As oft-repeated here the supply of quality models to the market will be a challenge. Thanks again to those who have made comment here, it's nice to have information about a company which holds a place in the hearts of many.

[Ozexpatriate]

I am presuming that PNC Business Credit is a unit of PNC Bank.

 

PNC Bank owns my mortgage. (I did not borrow money from them - they purchased the loan from a different bank and are the third mortgage holder of my loan.)

It is somewhat ironic to me that in addition to the purchases I make from Hornby PLC, some (small) percentage of the interest payments I make on the home I built to have a layout room is helping to keep the company afloat.

[BWsTrains]

Out of interest I Googled "PNC Bank" and came up with this:

 

 

just 7km down the road from me. Now Google Maps has thrown up some spurious links in its time but this surely takes the cake. I note there is good on and off street parking if anyone wants to pop in for a loan

 

 

 

[adb968008]

Out of interest I Googled "PNC Bank" and came up with this:

 

 

PNC.JPG

 

just 7km down the road from me. Now Google Maps has thrown up some spurious links in its time but this surely takes the cake. I note there is good on and off street parking if anyone wants to pop in for a loan

Worlds loco bank ?

 

:-)

[JSpencer]

It does rather look like LN has created a very good position from which to attempt the resurrection of Hornby.

 

As oft-repeated here the supply of quality models to the market will be a challenge. Thanks again to those who have made comment here, it's nice to have information about a company which holds a place in the hearts of many.

 

It does look like he must be pretty confident. He sold a 45% stake in Oxford Diecast for 1M GBP. But given the huge range they have and all the tooling involved, I suspect the company is worth a lot lot more than £2.5M.

 

He surrendered a lot but did not need too.

[jjb1970]

The value of any assets has to be offset by any liabilities, debt, consideration of company assets etc. If Hornby paid £1 million for a 45% stake then that would have reflected the value of the company at the time of the transaction.

[petethemole]

Out of interest I Googled "PNC Bank" and came up with this:

 

PNC.JPG

 

just 7km down the road from me. Now Google Maps has thrown up some spurious links in its time but this surely takes the cake. I note there is good on and off street parking if anyone wants to pop in for a loan

 

Apparently here: https://en.wikipedia.org/wiki/Tower_at_PNC_Plaza

 

First attempt via Google Maps,  got the office of a finance company in central Southampton.

[The Stationmaster]

See the that the managerial share buying binge among folk at Hornby continues and of course the share price is rising as they buy.  Toady Simon Kohler has lashed out on 15,115 shares at a. price of 33p each - considerably more than the earlier buyers paid last week - while LCD has today bought a total of 120,324 shares in two tranches at an average price of just over 33p each which gives him a tad over 0.2% of the company's issued share capital.  All of which suggest that whatever we might think about the debt being taken onboard by the company some of its Directors and senior people are placing their money in the same vicinity as whatever they are mouthing.

 

And if you had bought Hornby shares at their lowest point this year (20.5p)  you could now realise a (gross) profit of almost 14p per share assuming these folk are still buying.

Edited June 25, 2018 by The Stationmaster

[adb968008]

Just shows how little you need to spend to move the share price.

 

15k shares is £5k.

The 132k is £40k.

 

I’m speculating of course but the solid figures sounds like bonus payout territory to me, rather than investing.

 

132000 shares is not 2% of the share capital, otherwise you could by the company for £2mn.

 

http://investing.thisismoney.co.uk/quote/HRN

There are c125m Hornby shares in play, 90% owned by PAMP (75%) and Artemis (15%), which leaves c12.5mn shares in the publics hands, of which 2% of those are in LCDs hands.

 

Buying 2% of what’s there to be traded certainly would move the share price.

I wonder how many of the 12.5mn shares are in the hands of former directors ?..

Certainly 320k shares were vested in an LTIP last year to 3 directors at 32p a share.

http://investing.thisismoney.co.uk/news/article/id/5601339/

Well actually you can see..

Roger Canham acquired 2.8mn during his tenure.. (20% of what’s in circulation).

http://investing.thisismoney.co.uk/director-dealings/HRN/Hornby.html

given they were 95p a share, and the price has never risen, there’s a good chance he, like many others who paid much more for them are still sitting on them, rather than face a massive loss.

Edited June 25, 2018 by adb968008

[The Stationmaster]

Just shows how little you need to spend to move the share price.

 

15k shares is £5k.

The 132k is £40k.

 

I’m speculating of course but the solid figures sounds like bonus payout territory to me, rather than investing.

 

132000 shares is not 2% of the share capital, otherwise you could by the company for £2mn.

 

http://investing.thisismoney.co.uk/quote/HRN

There are c125m Hornby shares in play, 90% owned by PAMP (75%) and Artemis (15%), which leaves c12.5mn shares in the publics hands, of which 2% of those are in LCDs hands.

 

Buying 2% of what’s there to be traded certainly would move the share price.

I wonder how many of the 12.5mn shares are in the hands of former directors ?..

Certainly 320k shares were vested in an LTIP last year to 3 directors at 32p a share.

http://investing.thisismoney.co.uk/news/article/id/5601339/

Well actually you can see..

Roger Canham acquired 2.8mn during his tenure.. (20% of what’s in circulation).

http://investing.thisismoney.co.uk/director-dealings/HRN/Hornby.html

given they were 95p a share, and the price has never risen, there’s a good chance he, like many others who paid much more for them are still sitting on them, rather than face a massive loss.

 

Missing decimal now inserted - memo to self, don't type figures after a good lunch.

 

You point about bonuses is interesting as when you look at who has been buying it is basically Directors plus the two people (Mulholland and Kohler) hired by LCD as consultants but who are now listed in managerial posts at Hornby so are presumably employees of the company.  But what puzzles me is exactly what is going on here because as you say it could almost be bonus payout territory which begs the question why anybody is getting any sort of bonus in a company where the financial performance is as bad as Hornby's recently announced results (although there does seem to be a habit among some British companies of paying 'bonuses' etc to Directors of companies which are on there way to financial oblivion or are on the verge of inviting in the receivers)? 

 

So have they been paid bonus on the condition they buy shares, or have they been given share options valued in effect at current market price as it was last week irrespective of what they have to pay for them? Has every single employee of Hornby been offered the same facility/'bonus' related to their level of remuneration?  It all seems rather odd at at this stage to give something like this rather than a payment, share options etc or whatever when the company has actually turned the corner or is the idea to give them options at present share price in the hope that it will spur them to deliver the goods and hence benefit from a subsequent increase in the share price as part of the company's previous LTIP (Long Term Incentive Plan).  I can but assume it is the latter although it is not as yet described as such in the Company's RNS as it was in respect of past LTIP share dealings.

[adb968008]

is the idea to give them options at present share price in the hope that it will spur them to deliver the goods and hence benefit from a subsequent increase in the share price as part of the company's previous LTIP (Long Term Incentive Plan). I can but assume it is the latter although it is not as yet described as such in the Company's RNS as it was in respect of past LTIP share dealings.[/i]

That’s the usual assumption behind an LTIP, and as income it’s taxable in the tax year of receipt thus impetuous to ensure it does rise ! If you sell at a loss you get capital gains allowance (loss), but not your tax back !

IF this was an LTIP or bonus it’ll probably show up in a years time on 2018 accounts.

Edited June 25, 2018 by adb968008

[County of Yorkshire]

"And one last thing...

In Companies house, I found two charges listing conditions which PNC Capital & PAMP can take ownership of all Hornbys Brandnames (Airfix, Hornby, Humbrol, Corgi, Lima, Dublo, Pocher, Jouef etc) / assets if conditions of a test are not met, (The actual test is not displayed). Given there's a monthly check should those conditions not be met Hornby could find themselves without any assets, IP, plant etc which is an obviously pre-lude to bankruptcy... this game could be over at a moments notice.

The document detail is very precise including countries associated with trademarks and specific descriptions and intellectual property definitions, noticeably absent from these documents was: The stake in Oxford Rail and the Toolings in China, just about everything else down to laptops and computers is listed, so I dont think it was coincidence."

 

 

Usually, the test for enforcement of security is a breach of covenant. Effectively allows lenders to get to the negotiating table quickly and prevent companies from prevaricating.

 

That's quite a negotiation by LCD to exclude that stake from the security net... He's on a one way bet. I stated way above that PNC are not a cuddly UK lender - they'll be very transactional/unemotional if the business does not perform. I presume the charge they have is also over all cash and stock in the business.

 

David

 

Could LCD thus bundle the toolings in China off into Oxford Rail and continue to produce existing Hornby product under the Oxford Banner? I would struggle to believe that the charge over Hornby's IP is inclusive of the model designs (more likely centering on TM's and Brand Copyright) given that the tooling in China sits outside of the charge. Indeed, the Chinese are so dismissive of global IP regs anyway anyone could use the Hornby toolings out there to knock out models with little risk of litigation, so long as they were rebranded. Oxford Rail 'Express' anyone?   

 

LCD has built a lifeboat on a ship that has a 50/50 chance of sinking. 

 

CoY

[Clearwater]

Could LCD thus bundle the toolings in China off into Oxford Rail and continue to produce existing Hornby product under the Oxford Banner? I would struggle to believe that the charge over Hornby's IP is inclusive of the model designs (more likely centering on TM's and Brand Copyright) given that the tooling in China sits outside of the charge. Indeed, the Chinese are so dismissive of global IP regs anyway anyone could use the Hornby toolings out there to knock out models with little risk of litigation, so long as they were rebranded. Oxford Rail 'Express' anyone?   

 

LCD has built a lifeboat on a ship that has a 50/50 chance of sinking. 

 

CoY

I think that would be a "related parties" transaction and the creditors might have an issue with any such transfer shortly ahead of an insolvency. However, would Oxford be well placed if there was an insolvency of Hornby to pick up aspects of the tooling? Undoubtedly - not least they don't have the competition issues Bachmann may face. A legal minefield and whilst its not my field, I'd be surprised if there isn't case law pertaining to transfer of IP just ahead of insolvency.

 

Other interesting documents that are not public domain:

1) the shareholders agreement between Oxford and Hornby and what happens on insolvency - does Hornby have a put option to sell the stake back to Oxford's shareholders? YOu wouldn't expect it to transfer below market price and there may be a pre-agreed price. Possibly helpful to both parties as converting the shares to cash would put that cash receipt into the lenders' security net. Equally, does Oxford have any right to acquire more of Hornby from Phoenix (complicated by the takeover code given the listing.)

2) what is LCD's service contract and what that says about his role if there's an insolvency.

 

David

[phil gollin]

.

 

I don't know what is legal or not, but surely if the directors know/think that some deal is forthcoming (e.g. selling of a loss-making or low profit division for a price reasonably near its book value, then they would guess/estimate that the value of the company would increase ?

 

OR, they could have signed an agreement as part of working there to "put their money where their mouths are" ?

 

Or, ???????

 

.

[The Stationmaster]

Could LCD thus bundle the toolings in China off into Oxford Rail and continue to produce existing Hornby product under the Oxford Banner? I would struggle to believe that the charge over Hornby's IP is inclusive of the model designs (more likely centering on TM's and Brand Copyright) given that the tooling in China sits outside of the charge. Indeed, the Chinese are so dismissive of global IP regs anyway anyone could use the Hornby toolings out there to knock out models with little risk of litigation, so long as they were rebranded. Oxford Rail 'Express' anyone?   

 

LCD has built a lifeboat on a ship that has a 50/50 chance of sinking. 

 

CoY

 

I think the situation would be very different.  One possibility is as David ('Clearwater') has outlined but there a;ways remains a potential elephant in the room when dealing with Chinese factories. especially if they are owed, or consider themselves owed, money when a customer runs into financial hurdles or even more so faces going into receivership.  In such circumstances the factories might in any case be creditors and will therefore seek to recover monies owed by whatever means they have at their disposal - which would most likely mean them selling the tooling to the highest bidder, and I would be surprised if anybody outside China could do the slightest thing about a factory acting in that way.  So it is conceivable that despite whatever ownership any UK company might think it has of tooling located in Chinese factories if that company runs into a major debt situation with a factory then the factory will use the tooling to recover some of the debt.

 

We don't know Hornby's payment arrangements with the various factories and if it works on a basis which has been common with some with final payment being made as the goods clear UK customs then a factory might well be owed money.  Equally we don't know how any stage work payments are made so again there could conceivably be debts to factories outstanding at various stages in the development and production process at a point when the UK buyer ceases to be able to make payments.

[Keep the Faith]

 

We don't know Hornby's payment arrangements with the various factories and if it works on a basis which has been common with some with final payment being made as the goods clear UK customs then a factory might well be owed money.  Equally we don't know how any stage work payments are made so again there could conceivably be debts to factories outstanding at various stages in the development and production process at a point when the UK buyer ceases to be able to make payments.

 

Mike is absolutely right in that we don't know Hornby's set up with their factories but I would be amazed if the Chinese factories were working on any other basis than letter of credit - probably a 30 day basis.  In my experience the Chinese will not even order materials until they have seen the LC.

 

I suspect Hornby are facing a supply challenge will be their EU factories struggling to get credit insurance.  This may explain the reported poor supply of Humbrol paint (if these are UK supplied).

 

In the current retail climate there is also a real prospect that Hornby are struggling to get credit insurance for their customers and they then face the decision of whether to ship goods without insurance.  That's a big risk after Modelzone, Toys R Us, Maplin.  

[JSpencer]

The value of any assets has to be offset by any liabilities, debt, consideration of company assets etc. If Hornby paid £1 million for a 45% stake then that would have reflected the value of the company at the time of the transaction.

 

I would be very surprised if the Oxford organization was valued at just 2.5 M unless its debt/liabilities looks like Hornby's. The only assumption is that it is split into a few companies and Hornby brought part of just one.

[adb968008]

.

Edited November 6, 2018 by adb968008

[The Stationmaster]

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.

 

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But I recall reading Hornby bought a 49% share of LCD enterprises...That’s a different story..

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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).  

Edited June 26, 2018 by The Stationmaster

[Ozexpatriate]

...

The document detail is very precise including countries associated with trademarks and specific descriptions and intellectual property definitions, noticeably absent from these documents was: The stake in Oxford Rail and the Toolings in China, just about everything else down to laptops and computers is listed, so I dont think it was coincidence.

Could LCD thus bundle the toolings in China off into Oxford Rail and continue to produce existing Hornby product under the Oxford Banner? I would struggle to believe that the charge over Hornby's IP is inclusive of the model designs (more likely centering on TM's and Brand Copyright) given that the tooling in China sits outside of the charge. Indeed, the Chinese are so dismissive of global IP regs anyway anyone could use the Hornby toolings out there to knock out models with little risk of litigation, so long as they were rebranded. Oxford Rail 'Express' anyone? 

... there a;ways remains a potential elephant in the room when dealing with Chinese factories. especially if they are owed, or consider themselves owed, money when a customer runs into financial hurdles or even more so faces going into receivership.  In such circumstances the factories might in any case be creditors and will therefore seek to recover monies owed by whatever means they have at their disposal - which would most likely mean them selling the tooling to the highest bidder, and I would be surprised if anybody outside China could do the slightest thing about a factory acting in that way.  So it is conceivable that despite whatever ownership any UK company might think it has of tooling located in Chinese factories if that company runs into a major debt situation with a factory then the factory will use the tooling to recover some of the debt.

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 least, the tools are, as Mike notes, negotiable assets.

Edited June 26, 2018 by Ozexpatriate