Hornby wins reprieve

Hornby has had an absolute shocker so far in 2016. A major profits warning last month plunged the share price back to levels not seen since the mid-1990s when the train set and Scalextric maker was shifting all manufacturing to China. The actual low stretched back to 1987.

But after losing three-quarters of its value in just two miserable days in February, Hornby has given the market some better news and the share price is up as much as 14% Wednesday. Big lender Barclays has agreed to waive March's covenant testing after the company warned seven weeks ago it could breach the covenants of its banking facility next month.

What's more, there's obvious relief that management reports recent trading is in line with reduced expectations. Sales are down 2% in the year to Sunday 27 March, just four days before year-end. UK sales are actually up 4%, so Europe gets the blame for the shortfall.

Despite a decent Christmas, poor sales since, plus a £1 million write-off following a full stock take, pushed Hornby's profit forecasts deeper into the red this year. Disappointing sales will wipe out £2.5-3 million of trading profit, its top number crunchers cautioned in February, and they warn of an annual underlying loss before tax of £5.5-6 million.

Understandably, the UK business was never going to maintain the impressive momentum in the run up to Christmas when like-for-like sales rose 17%. And they have, at least, recovered from January, when revenue progress moved into negative territory. Investors will have to wait until full-year results in June for a more detailed breakdown.

Changing tracks

Last year was one of major change for the railway set maker as it struggles to modernise its products and improve behind-the-scenes logistics. This investment has cost Hornby a lot in time and cash, with the disruption to trading leaving a deep scar.

"Despite the clear operational progress being made and strong stable of brands, we move our recommendation [to] 'under review' as the 'causes and consequences' of this poor trading period are reviewed," said Numis analyst Andrew Wade at the time.

Bouncing from a low not seen since 1987, Hornby duly delivered a "dead cat bounce" back toward 40p, the 23.6% Fibonacci retracement level from last August's high. A portion of these gains were subsequently unwound, and, despite today's rally, Hornby shares remain vulnerable until there's evidence of a return to sustainable growth in both sales and profit.

Reflecting the uncertainty surrounding this company, Wade's forecasts do not extend further than the current year. And while weakness can often be viewed as an attractive entry point, Hornby admits it has suffered a substantial setback in its recovery plan. Expect further volatility until management update the market in the summer.

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