A positive trading statement flags up a strong recovery in sales and profits.
Has Hornby (LSE: HRN) turned the corner? Today's pre-close trading statement explicitly states that all the problems that have beset the iconic planes-to-trains toy maker in the past two years have been put to bed. This should mean a much better financial performance in the year ending March 2011.
When I last looked at Horny in June 2009, the picture was decidedly mixed. This specialist supplier had dominated its niche, and seen revenues, profits and dividends steadily rise for five years. But it had hit the buffers. Problems with its Far Eastern supply chain were a particular concern, but there were also exchange rate issues and falling demand to contend with, plus rising debt.
The company skipped its final dividend and although the shares looked cheap at 100p, the future was uncertain, especially with the supplier issues unresolved.
I was too cautious. Investors in 2009 seemed to gravitate towards troubled companies, and Hornby was up 70% by the end of the year. Oops!
However, as has been the way with many companies in the 'dash to trash' rally, Hornby seemed to be subsequently punished for delivering steadily more positive news.
The train company's shares finally ran out of puff earlier this year -- you could pick them up for just 110p yesterday, barely above where we began back in June.
Bad but getting better
Away from the ups and downs of the share price, how has the underlying business situation changed?
Well, Hornby's half-year results to 30 September were poor as expected -- while sales actually rose a touch to £25.5 million, pre-tax profits over the period more than halved to £700,000. There was good news in the form of falling net debt, an improved and more diversified Chinese supply base, and Hornby winning a licence to make branded toys for the London 2012 Olympics.
CEO Frank Martin also told reporters that Hornby was benefiting from the demise of Woolworths, which meant more parents were going into specialist toy stores and re-discovering Hornby's trains, Scalextric cars, and Airfix models.
The story improved further with an interim management statement in January, with Chairman Neil Johnson talking about "a positive final quarter to the financial year" and "the progress that has been made in resolving the previous supply chain issues".
The company said it was making more competitive products -- a sensible response to the weaker economic climate -- and that its recently acquired Airfix, Humbrol, and Corgi brands were all showing encouraging growth.
The shares fell on the good news, proving again the adage that it's better to travel than to arrive when investing -- even with model trains.
Christmas cheer
This brings us to Wednesday's pre-close trading statement, which seems to cement the case for a return to growth at Hornby:
"We are delighted to report that the financial year finished with an excellent performance across the business. Following a good pre-Christmas sell-through, we have experienced good order intake during the final quarter of the financial year in all of our brands and in most of the markets in which we operate. It is particularly encouraging to note that there has been a significant increase in orders in our Hornby and Scalextric ranges compared to the same period last year."
Hornby even raised the possibility of a resumed dividend payment for the year to March 2010. But it was the outlook that was the most positive, with the company talking about a 'strong recovery' and Chairman Neil Johnson sounding even more confident Hornby has put its troubles behind it:
"A year ago we were facing three major challenges: a fragile supply chain, reduced demand from our retailers and an unfavourable sterling/dollar exchange rate. Today, we have much improved visibility and control over the supply chain, retailers are hungry for our products and we have secured the bulk of our currency requirements for the year to 31 March 2011 at favourable rates."
Johnson added that demand was growing both in the UK and abroad.
Engine of growth
On the back of today's statement, investors have woken up again to the recovery in play at Hornby. The shares have risen as much as 10% as I write, and are currently 128p.
I don't think we can expect anything incredible in the results for the 2010 financial year. While Christmas was better than expected, Hornby said in January that trading was in line with market expectations, rather than shooting the lights out.
Analysts at Numis last week forecast pre-tax profits of £5 million and earnings per share of 9.1p, rising in 2011 to £6.8 million and 12.3p respectively. At 128p per share, that puts Hornby on a P/E of 14, with the forward P/E just over 10.
Not crazily cheap, but a 35% growth rate is not to be sniffed at -- it represents an attractive PEG factor of under 0.3.
Of course these are forecasts, not gospel truth -- though they're as likely to be revised upwards as down, given today's positive statement. And Hornby boasted annual earnings of over 15p per share for several years until 2009, so they don't seem overly ambitious, especially given that it has acquired several more unique niche brands since then.
I said last time I'd consider buying Hornby shares when the supply problems were resolved, and the chairman says they're fixed. It could make a very nice investment from here.
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