Hornby shares chug higher as it completes first phase of turnaround

Model train maker Hornby, which has recently issued a string of profit warnings, said on Friday that the first stage of its turnaround has now completed and it has successfully restructured its European and UK operations, resulting in structural improvements to the cost base.

In addition, the group, which makes Scalextric, said the product range has been rationalised and refocused, allowing it to reduce capital expenditure and improve working capital.

In a trading update for the period from 6 February to 31 March 2017, Hornby said its revenue performance for the full year was slightly ahead of its plan, with the fourth quarter showing an improving trend.

As at the end of March, the company had net cash on the balance sheet of £1.1m, versus net debt of £7.2m in March 2016, which was ahead of management's expectations.

Chief executive officer Steve Cooke said: "I am pleased to report that the first stage of our turnaround plan has been successful and this provides a strong base from which Hornby can build. It has been a challenging time for all of Hornby's employees and I would like to thank them for their dedication, commitment and hard work over the past year.

"Improving our customer focus has been a key part of the plan and I am particularly pleased that we have now begun to restore our leading position with our core hobby retail customers. Coupled with the considerable improvement in our financial position, I am confident that we have set the group on the right course to generate value for all our stakeholders."

Hornby had previously said that revenue was expected to drop by around 20-25% this financial year due to the rationalisation of the business.

Neil Wilson, senior market analyst at ETX Capital, said cash flow stands out in the update.

"It now needs to grow the brand. This could be more challenging. Its ‘iconic’ brand has value for oldies but does an Airfix model Spitfire quite set the pulses racing like they used to? Under Ames the group began swapping Spitfires for Lamborghini Aventadors but growing out beyond the core, older hobbyist base is going to be tough. Chugging along managing a slow and steady decline may be all that Hornby can hope for.”

Numis said the trading update was "encouraging" and it continues to expect a return to profitability in full-year 2018.

"We continue to believe management’s focus on prioritising profitability and a right-sized cost base is the right approach and, reflected in our forecasts, see a tangible pathway for the business to return to profitability in FY18. With the key elements of the turnaround plan – cost streamlining, range rationalisation, re-engagement with independent customers – progressing as planned, we retain our positive stance."

At 1046 BST, the shares were up 6.3% to 32.69p.