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Hornby (LON:HRN)

Share price: 64p
No. shares: 39.16m
Market Cap: £25.1m

This models company has been having trouble for a while now, due to messing up its supply chain when they moved production offshore. I was very scathing about it last time, perhaps too much so, but it looks as if the company is beginning to recover, and there might be turnaround potential in the shares.

Trading update (IMS) - issued today, it covers the period since the last year end, on 31 Mar 2014. On sales they say;

The sales performance of the Group in the period up to the end of July has been in line with Company expectations and slightly ahead of the corresponding period last year.  Recent sales of Airfix and Corgi have been encouraging, the former driven by the launch of the '1/24 Hawker Typhoon MKB1' to great acclaim.  Management of aged stock has been a priority in the period and good progress has been made across the brands.

I haven't bolded the bit about in line with company expectations, because the above only refers to sales, whereas it's profit that matters most. I'm somewhat concerned by the comment about aged stock, which suggests there might be further write-downs of stock in the pipeline perhaps?

On supply chain problems, it sounds like they are making progress, but are not out of the woods yet;

There continues to be significant focus on the production processes for Hornby and Scalextric product from our supplier partners in Asia.  We are working with an increased number of factories in our network and improving the capability of vendors and therefore, whilst we still foresee challenges in ongoing production, we remain confident that supplies of key products will improve over time

Hmmm, that doesn't sound particularly encouraging. Translation - we're still in a bit of a mess!

A new MD for Asia has been appointed, with good supply chain experience. Let's hope he can sort things out.

Net Debt - has risen to £10.7m at end July 2014 (£7.4m a year earlier) which is of some concern. Looking back to the last set of results, the company has banking facilities available until Dec 2015. Banks don't like lending money to loss-making companies, so I'm nervous about this.

So whilst the risk of the bank pulling the plug completely might be low (at the moment), don't be surprised if the company tries…

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