In this article I’ll explain what’s gone wrong — and ask whether today’s falls provide a buying opportunity for investors.
Shares in Hornby fell by as much as 46% this morning, after the firm warned investors to expect a pre-tax loss of £5.5m to £6m for the financial year ending in March. That’s three times greater than the £2m pre-tax loss the firm forecast in November.
Hornby says that the problems are the result of disappointing sales and disruption caused by the restructuring of the firm’s supply chain. Together, these have had “a significant impact on the trading performance of the business”.
This explanation might be acceptable, were it not for a more serious problem.
Hornby said this morning that there’s a risk the group will breach one of its lending covenants in March. The group is in discussions with the lender to try and resolve this, but it could result in even bigger losses for equity investors if fresh cash is required.
Although Hornby raised £15m in a placing at 95p per share last June, this obviously wasn’t enough. Investors who took part in the last placing are now sitting on a 50% loss. I suspect they will be reluctant to back a second fundraising unless the new shares are issued at a massive discount to the current share price.
For shareholders who are unable or unwilling to take part, this could result in significant further losses and dilution.
Hornby’s management forecasts have proved to be highly inaccurate and now lack credibility. Until the firm’s finances have been stabilised, I would steer clear. Further falls are possible, so I wouldn’t rule out selling after today’s news.
UK engineering firm Renold has two divisions, Chain and Torque Transmission. Products include gearboxes and chains used to drive conveyor belts, which are used in a number of industries.
The group issued a profit warning today, telling investors that weak sales had continued into the second half of the year. Underlying sales are now expected to be 10% lower than last year, while adjusted operating profit is expected to fall by £2m. Based on last year’s results, this implies a figure of about £13m.
Unfortunately, Renold didn’t specify the likely impact of exceptional costs or currency effects, making it hard to predict how earnings per share are likely to pan out for the year ending 31 March.
Another concern is that net debt is expected to rise this year, although the firm says it will remain within its covenants. I estimate a year-end net debt figure of at least £25m is likely, which looks quite substantial relative to last year’s post-tax profit of £5.5m.
A final concern is that Renold has a significant pension deficit. Steps have been taken to reduce this over the last couple of years, but I expect a deficit of at least £50m to remain at the end of the year.
Renold has an uncertain outlook and a very average balance sheet. In my view, this stock isn’t an obvious recovery buy at the moment. I’d wait until we have more visibility on earnings and debt levels before making a decision.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.