Small Cap Value Report (10 Feb 2016) - HRN, WAND, RNO

Wednesday, Feb 10 2016 by

Good morning!

There are 3 profit warnings I want to comment on today. Is this a sign of a worsening economy? Not really, as all 3 are companies with existing or previous problems, so for the time being anyway I'm still fairly sanguine on the outlook for the UK economy (not sure about overseas though).

So let's take a look, in order of magnitude of today's share price falls.

Hornby (LON:HRN)

Share price: 39.6p (down 51.1% today)
No. shares: 55.0m
Market cap: £21.8m

Just a bit of catch-up first;

I reported here on 18 Jun 2015 about Hornby's £15m equity fundraising at 95p, and how amazed I was that it had been possible to raise fresh funding in what was effectively a rescue refinancing, to get the bank off the hook. Sure enough, the investors who backed that 95p fundraising are looking unwise now, and indeed looked unwise at the time too.

In my report of 12 Aug 2015 I noted the non-specific but generally positive-sounding trading update, and the move from the main listing, to AIM (a sensible move for a company of this size, in my view), concluding that the shares (at 107.7p) were too high, given that the turnaround was not cemented yet. Risk:reward was all wrong at that price - with shareholders being asked to pay up-front for what was then only a tentative turnaround.

Interim results on 8 Dec 2015 look pretty awful, I didn't report on them at the time, but am just looking at them now. It was clear from the interim numbers that the turnaround plan was not working, and once again Hornby slipped into losses - £3.4m for H1, and that's before adjustments, exceptionals, etc. Once again however, management peppered the narrative with optimistic noises about the outlook.

Profit warning - here we are today, and it's clear the wheels are coming off. Clearly a serious profit warning, to have triggered a fall in share price of over 50% today, on top of the drift downwards in price since Aug 2015.

UK sales performance seems to have fallen off a cliff in Jan 2016, which looks very strange to me;

In the UK the Group saw a strong sales performance in the key November and December period as sales opportunities were maximised in the run up to Christmas. Like for like sales in this period…

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Hornby Plc is a holding company. The Company is engaged in developing, designing, sourcing and distribution of hobby and interactive products. The Company distributes its products through a network of specialists through its online activities and various retailers throughout the United Kingdom and overseas. The Company has operations in the United Kingdom, the United States, Spain, Italy and the rest of Europe. The Company offers its products under various brands, such as Hornby, Scalextric, Airfix, Humbrol and Corgi. Its subsidiary, Hornby Hobbies Limited, offers products under various categories, which include Train Sets, Locomotives, Train Packs, Tracks and Extras, Wagons and Coaches, and Spares and Accessories. Its subsidiaries include Hornby Espana S.A., which is engaged in the development, design, sourcing and distribution of models, and Hornby America Inc., Hornby Italia s.r.l, Hornby France S.A.S and Hornby Deutschland GmbH, which are distributors of models. more »

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WANdisco is a distributed computing company. The Company, provides a LIVE DATA platform, WANdisco Fusion, powered by its patented Distributed Co-ordinated Engine, DConE, technology. WANdisco Fusion enables the replication of live data to the cloud and on-premises data centers with guaranteed consistency, continuous availability and no business disruption. The Company offers a range of products, which solve critical data management challenges prevalent across cloud computing, big data and the source code management markets. The Company’s geographical segments are North America, Europe and the Rest of the World. Its products are used for disaster recovery, migration to cloud, hybrid cloud, analytics infrastructure, multi cloud, Internet of things and security and compliance. more »

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Renold plc is engaged in delivering engineered and power transmission products and solutions across the world. The Company's Chain segment manufactures and sells power transmission and conveyor chain and includes sales of torque transmission product through Chain National Sales Companies (NSCs). It has manufacturing sites in the United States, Germany, India, China, Malaysia and Australia. It also offers leaf chain used in the forklift trucks. Its Torque Transmission segment manufactures and sells torque transmission products, such as gearboxes and couplings. It is a manufacturer and developer of coupling and gearbox solutions, from fluid couplings to rubber-in-compression and rubber-in-shear couplings, and a range of worm gears, helical and bevel helical worm drives. It also manufactures gear spindles. The applications of conveyor chain include theme park rides, water treatment plants, cement mills, agricultural machinery, mining and sugar production. more »

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  Is LON:HRN fundamentally strong or weak? Find out More »

19 Comments on this Article show/hide all

Patrick Dier 10th Feb '16 1 of 19

Hi Paul,
Thoughts on the Animalcare (LON:ANCR) half year out today?

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kalkanite 10th Feb '16 2 of 19

Hi Paul

As an aside, I think companies that make a great song & dance about having a turnaround plan, and give it a silly name, as if it were some kind of separate entity, often seem to come unstuck. When actually, turning a business around is all about starting to manage it well, instead of badly.

A great comment, this is so often the case that management are actually talking about doing the fundamental day to day operational management. It's generally a red flag as it means they haven't got a clue what they are doing.

FCCN discussed their turn around plans a few years ago, it was basic operations that they should have already been doing and here we are a few years on and they still can't get it right. Would be a good investment if Stephen Marks was to retire.

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Brackendale 10th Feb '16 3 of 19

Hornby - excellent analysis Paul. I remember looking at it a few years ago when the story was that demand was flying but a supply problem with a factory in Asia had temporarily meant they could not meet that demand. With some apparently good brands it looked like a good proposition to be a turnaround. But this is now the second management team that has struggled with it. A good case study and another one that reinforces my view that when management comes in and starts talking "values" and "passion" it's not just meaningless but downright dangerous! Only ray of hope for the poor investors perhaps that the brands might make an attractive target at a low price? Scraping the barrel..

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Gostevie 10th Feb '16 4 of 19

Hello Paul,

Have to say your report on Hornby (LON:HRN) is the very best piece of analytical financial writing that I have seen in a very long time indeed, Really superb stuff! Thankfully I have never held shares in the company. What a mess.

Still like their trains though...


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Fegger 10th Feb '16 5 of 19

The explanation for falling off the cliff may be that they were having troubles but managed to revive by a good push to Christmas . I think a lot of sets would be sold to adults who may not buy at other times of the year. From my perspective few kids ask for train sets now so the lack of demand is really showing now in January.

As others have said an excellent piece of analysis and essential reading!

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Mark Carter 10th Feb '16 6 of 19

I don't see how WANdisco (LON:WAND) can both cut costs and grow at the same time. If they are cutting costs, then they are retrenching, which kills it as a growth stock, which is what it is purports to be.

This one will eventually fail. It's just a question of time.

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dscollard 10th Feb '16 7 of 19

enjoyed that analysis, made me chuckle.

To quote Buffet,  tho I am not sure brilliance can be applied to rubber chicken eaters who are more endeared with their PowerPointware than the day-to-day:

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact

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BahrainChris 10th Feb '16 8 of 19

Have you ever thought of simply shorting everything on your bargepole list?

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colinhow 10th Feb '16 9 of 19

In reply to post #121028

@BahrainChris - I certainly have!

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Paul Scott 10th Feb '16 10 of 19

In reply to post #121028

Hi BahrainChris,

I try to avoid shorting small caps, as it's too dangerous.

I've seen some crazy things happen over the years - e.g. something called CPP looked certain to go bust, and the shares went to 1p. Then they spiked up to 31p. Apparently some well-known shorters lost their shirts on this, as they had to buy back at any price.

Or say if WAND suddenly did announce a huge contract win, and the shares 5-bagged overnight. It's possible. Unlikely yes, but I wouldn't ever want to take that risk.

So I keep my shorts to mainly US large caps, and just ride the waves down, then close. Then re-short them again when they're rebounded upwards a bit, and when the market looks ready to tumble again. At least you can sleep at night with shorts on large caps. You can't if you're short small caps, and there was a story recently of a US punter who ended up $340k in debt when a small short position in a biotech went disastrously wrong.

Also, the really tiny stocks, you often cannot short them, the SB cos won't do them if they can't get a borrow. Or they might let you open a short against one of their client's existing long positions, but the trouble is then, your short is closed out when that punter decides to close their long. That completely ruins risk:reward for me, if I'm not in control of when I can close the position.

Shorting is a real minefield, and for most people best left well alone. I only do it with great caution, and only on large caps usually.

Regards, Paul.

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Mark Carter 10th Feb '16 11 of 19

Here's my take on Hornby (LON:HRN): it has had a ROCE of 2.5% over the last 5 years, which is abysmal. It has debt, and trades above book. It has lost money, in aggregate, over the last 5 years.

Despite a long and illustrious history, the company is basically a has-been. It's for traders, not investors.

Google Trends shows that interest has been waning over the last decade. It reminds me of Stanley Gibbons (LON:SGI).

I won't be investing.

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jonesj 10th Feb '16 12 of 19

I wouldn't be sure about Renold getting even replacement business when the chains wear out. It is necessary to understand the competition, which means it lands on the "too difficult" pile for me.

If we look at another commodity -roller bearings, each bearing manufacturer will offer a catalogue of standard bearing sizes, which even have the same number printed on the side. If your FAG 6204 bearing wears out, you can replace it with an NSK 6204, or the same bearing from umpteen other manufacturers, in Europe, Japan & China.

I don't know how the chain business is, but the first Renold chain catalogue I found on their website has Renold numbers in the first column and ISO numbers in the second column. I presume any ISO chain with the same number will fit, but am not going to investigate any further, as this investment is not for me.

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millen 10th Feb '16 13 of 19

Yes, nice write up on Renold.
One detail - the 7 December RNS said they've derisked 50% of their liability for UK pensions in payment. Typically a DB scheme will have a similar liability again for its deferred pensioners, which are harder to derisk through buy-ins. The pensions disclosures to the accounts should show the breakdown of liability.

I thought Renold is a long established brand with a well diversified client base. I'm wondering if the decline in revenue is a precursor to stress in the engineering sector? Or is there growing competition from Germany and Japan?

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BEN12358 10th Feb '16 14 of 19

Re Tangent Comms it looks as though Maven Venture Capital have purchased 1.87% of the share capital today. Presumably this indicates they may be helping finance the share buy-back, lending the company money as well?

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cig 11th Feb '16 15 of 19

In reply to post #121052

May not be enough to make it investable (yet), but it doesn't trade above book does it? (Market cap 16m, book 42m)

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Mark Carter 11th Feb '16 16 of 19

In reply to post #121118

My bad. You are correct. I must have been looking at the wrong ticker at the time.

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Jack Owen 11th Feb '16 17 of 19

In the right hands Hornby has some valuable brand names, known internationally. Where it goes from here is up to the institutional investors, which own most of the company 75% and Barclays. May need to sell off some of its brands and liquidate its slow moving stock to generate cash to keep Barclays happy. Situation reminds of Lego when it got itself in a mess. We can live in hope it will survive, as an independent, but really needs to be part of a bigger company

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Funderstruck 11th Feb '16 18 of 19

Re Renold;
Their product is used in mining particularly coal, which is where I believe it built it's reputation in the UK where that business is no longer; possibly exports to Poland, but Price?? Other mining is on hold now until demand for resources picks up. Looks very long term.

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Paul Scott 12th Feb '16 19 of 19

In reply to post #121157

Hi Jack Owen,

Yes, fair points ( post 17). I agree that Hornby does have some iconic brands, and in the right management hands, there could be value there.

I would look at it with an open mind, once it has resolved its financing needs. The shareholder list is quite heavily concentrated too, so they probably won't want an embarrassing disaster on their hands. Therefore it's possible that a rescue deal may be agreed.

I wrote the above article when the shares were 39p. They are now, a couple of days later, only 24.5p, so risk:reward has improved in terms of considering it investable. I'll wait to see what the major shareholders/bank decide to do. Then look at it fresh once that news is out.

Regards, Paul.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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