From aeroplanes to railways, model vehicles seem to have an enduring appeal that resonates with both adults and children. Accordingly, Hornby (HRN), which makes the eponymous train sets as well as owning the Airfix, Corgi, Scalextric, and Humbrol brands, has a dependable and steady flow of business. However, supply chain and logistical nightmares derailed trading in recent years, leaving the company loss-making. But Hornby is now tackling these issues head on, and a recovery is under way that could restore profitability to pre-crisis levels. If this comes off, there should be substantial upside based on the share's current derisory price-to-sales multiple.
- Diversifying supplier base
- Low sales multiple
- Scope for margin improvement
- New logistics contract
- Relaunched website
- Loss-making
- Christmas critical for share price
Hornby has suffered its fair share of crises these past few years. The financial downturn dented consumer demand globally, sales of London 2012 Olympic merchandise flopped and its largest supplier in China has caused ongoing disruption to the supply chain. But things are starting to look up.
Consumer confidence seems to be picking up and the Olympics are long gone. Meanwhile, Hornby has been diversifying its supplier portfolio, away from over-reliance on a single manufacturer in China. It now operates through a number of different factories and production of Airfix products has been repatriated to the UK, allowing Hornby to quickly ramp up production to meet demand.
Stock management offers another self-help opportunity. The antiquated facility in Margate recently relocated to a high-tech third-party logistics warehouse, big enough to accommodate growth as the turnaround story materialises. Hornby stands to benefit from improvements it's making in other areas of the business, too, such as a new website. This went live in June and already average order values are up 15 per cent and customer conversion rates are 40 per cent higher.
With the new systems in place, there is plenty of potential for Hornby to reclaim lost margins. For example, the gross profit margin in the year to March 2014 year came in at 45 per cent, compared with historic levels of over 50 per cent. The operating margin was negative, with a £1m operating loss on sales of £51.6m. Compare that with 2008, when Hornby achieved an operating profit of £9.1m on sales of £55.7m, equating to a beefy 16.4 per cent margin. Even back in 2010 the margin was over 10 per cent.
True, the pace of change is likely to be slow and in the near term there is a lot hinging on Christmas trading. However, in the longer term the upside could be huge with the shares valued at just 0.5 times sales. That compares with a five-year price-to-sales high of one times. Even this reflects a rating in decline, as the shares traded at over two times sales when profitability was at those lofty 2008 levels.
| HORNBY (HRN) | ||||
|---|---|---|---|---|
| ORD PRICE: | 66p | MARKET VALUE: | £26m | |
| TOUCH: | 64-68p | 12-MONTH HIGH: | 87p | LOW: 60p |
| DIVIDEND YIELD: | nil | PE RATIO: | 17 | |
| NET ASSET VALUE: | 80p* | NET DEBT: | 23% | |
| Year to 31 Mar | Turnover (£m) | Adjusted pre-tax profit (£m) | Adjusted Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 64.4 | 4.5 | 9.6 | 3.7 |
| 2013 | 57.4 | 0.2 | 0.5 | 0 |
| 2014 | 51.6 | -1.1 | -2.1 | 0 |
| 2015** | 54.8 | 1.5 | 2.8 | 0 |
| 2016** | 57.3 | 2.0 | 3.9 | 0 |
| % change | +5 | +33 | +39 | - |
Normal market size: 5,000 Matched bargain trading Beta: 0.24 *Includes intangible assets of £12m, or 31p a share **Numis Securities forecasts | ||||
