2 turnaround stocks you might consider buying right now

These two turnaround stocks have a long journey ahead of them, says Harvey Jones.

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Model maker Hornby (LSE: HRN) went off the rails in 2016, almost collapsing after breaching its banking covenants with Barclays. The much-loved British institution’s brands Scalextric, Airfix, Humbrol and Corgi cars take me straight back to my childhood, but don’t have the same traction with kids today. 

Broken model

Former chief executive Richard Ames resigned in February 2016 following the third profit warning in five months while chairman Roger Canham resigned today with immediate effect after Phoenix Asset Management Partners, of whom he is a director, launched a mandatory 32.375p a share offer for the shares in the model train set maker it doesn’t already own, valuing it at £27.4m. Hornby has been concentrating on streamlining costs and stabilising its existing brands, and although it scrapped its dividend again today it claims to have now completed the first stage of its turnaround plan.

Picking up steam

The headline numbers don’t look great, with revenue falling from £55.8m in 2016 to £47.4m, while the underlying loss before tax widened from £5.7m to £6.3m. However, the direction of travel looks more positive, with the reported loss before tax falling from £13.5m to £9.5m. Hornby incurred exceptional items of £3.3m, but that was down from £7.9m in 2016.

On 31 March, net cash stood at £1.5m, a big improvement on last year’s £7.2m. Hornby has been streamlining its operating model, reducing costs, supporting key UK brands, improving cash generation and focusing on profitable products to build margins, which now stand at 40%. City analysts say management can turn this year’s underlying loss into a pre-tax profit of £500,000 in the year to 31 March 2018. However, revenue growth looks minimal, and right now Hornby looks like a slow train coming.

Minds games

Intellectual property firm Allied Minds (LSE: ALM) has also been through a tough time, its share price down 51% over the past year, and 75% over two years. Its shares fell off a cliff in April after it announced a $146m writedown on the value of seven of its subsidiaries, which it is now looking to sell, transfer or liquidate.

There is nothing wrong with closing down struggling subsidiaries to focus on the successes but investors felt aggrieved having being asked to pump in £64m in fresh equity just three months earlier. Top fund manager Neil Woodford, who owns 30% of the university and government technology commercialisation specialist, forked out £15m and is publicly standing by his controversial pick, but others are rightly more wary.

Scary stuff

You don’t need me to tell you that private equity is a risky business and you might agree with chief executive Jill Smith’s view that these “necessary” measures place Allied Minds in a stronger position to deliver returns to shareholders through accelerated commercialisation, monetisation and portfolio growth. 

This could be a brave recovery play. Woodford certainly hopes so, but Allied Minds looks far too risky for me. It looks on course to deliver its fifth consecutive year of pre-tax losses at around £92m in the calendar year 2017, with a forecast rise to £96.71m in 2018. Obviously, the company is focused on investing in assets right now, the problem is that delivery has been non-existent. Neil Woodford is a far braver man than I am.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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