A train-set maker to snap up before Christmas

By Deputy Editor Tim Bennett Nov 17, 2009

Tim Bennett

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It's been a rough half-year for toy maker Hornby (LSE:HRN). However there are plenty of reasons to hop on board.

Pre-tax profit slumped to £700,000 in the six months to 30th September, down from £1.8m last year. And after a strong rise since March's low, the shares hit a recent peak of £1.70 but have since drifted to nearer £1.49. That performance dip is largely down to two factors.

First off, the firm is clearly much better at making toys than it is at managing foreign currency risk. Overall, the weakness of the pound has cost Hornby £1.6m, says CEO Frank Martin in the Times. However that's likely to be a one-off hit. The Bank of England hinted last week that the UK is on the road to recovery, albeit a slow one. So although the pound could easily dip again, Hornby is unlikely to have to deal with another sterling slump on this year's scale.

Next, the firm hit trouble with a key Chinese supplier. Not many firms supply the relatively niche toys that Hornby sells, so a major manufacturer getting itself into financial difficulty caused big problems. However, Hornby is taking steps to replace it with a more reliable Hong Kong based firm.

Those two sizeable challenges aside, there's plenty to like. First, Hornby is winning some very high-profile merchandising deals. For example, the latest TV series hosted by Top Gear presenter James May recently featured Hornby brand Airfix – indeed, a full-scale replica Spitfire was built using the stuff. That triggered a doubling of aircraft kit sales.

Next, Britain's first-ever back-to-back Formula 1 championship victories, courtesy of Jenson Button, should provide a welcome boost to Scalextric sales. Sure, you can replicate F1 on many video games, but none of them beats side-swiping an opponent's replica car on a fast bend.

Thirdly, Hornby has a valuable licence to make official models and souvenirs for the 2012 Olympics.

And this Christmas, customers who used to shop at Woolworths now can't. Its demise will, however, help specialist retailers such as Hornby.

Finally, the success of TV show Strictly Come Dancing proves that nostalgia is in vogue during the downturn. And toys don't come more nostalgic than miniature Spitfires, train sets and racing tracks. That's yet another reason for investors doing some early Christmas shopping to bag Hornby shares.

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Published in Tips & advice | More articles by Tim Bennett

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