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Hornby Requisition Opposed

Investor Alexander Anton previously requisitioned a General Meeting of Hornby (HRN) to have Chairman Roger Canham removed from the board and get himself appointed as a director. Mr Anton has the support of the second largest investor in Hornby in New Pistoia, but the largest investor is Phoenix Asset Management. The long standing Chairman of Hornby, Roger Canham, is also Chairman of Phoenix which Mr Anton suggests is not a good arrangement so far as corporate governance is concerned. Hornby, the maker of train sets and toys, has had a poor financial performance in recent years with production difficulties and consistent losses. The company undertook a strategic review in early 2016 and has been working to a “turnaround plan” since then. The company has been reporting “good progress” against that plan, although the last interim results still reported a loss of £4.7 million on revenues which were down at £21.9 million. But debt was reduced. A pre-close trading statement for the March year end confirmed there would be a loss for the year but noted a positive cash position after stock reductions and disposal of the Margate site. There were also positive noises about current trading.

Mr Anton was involved in the board revolution at Victoria, the carpet company, a few years ago. That was very successful and the company has gone from strength to strength since then under the new leadership of Geoff Wilding. There are some similarities between the problems at Victoria and Hornby. Excessively large product range, very high stock levels in relation to sales, stagnant or declining sales (revenue is forecast to be £45m at Hornby this year when it was £65m five years ago) and management who seemed incapable or unwilling to tackle the issues vigorously although Hornby might say that they have now been doing so.

The company has now published a circular for the EGM to consider the requisition on the 16th May. As was not unexpected the company has recommended shareholders vote against the resolutions on the basis that the current strategy is working and there is nothing amiss as regards corporate governance. They also say they already have the committed and irrevocable support of 54% of shareholders to vote against, so it seems very unlikely the resolutions will pass. But even if they do not, if the company’s final results do not improve substantially that may not be the end of the matter.

Comments: Having spoken to both Mr Anton, and to David Adams, the Senior Independent Director at Hornby, these are my views:

One only has to look at the product range (Hornby trains, Scalextric cars, Corgi models, etc) to realise that the company seems to be stuck in the past. Do steam engines and World War II planes really appeal to kids nowadays? Or even to the parents that might buy them for their children? One can see exactly why sales revenues have been declining for many years and are likely to fall further with product rationalisation taking place, while the product range is still enormous. The web site which is now the key “shop-front” for most retailers also looks old-fashioned.

So this looks to be a company with major sales and marketing problems and possibly problems with its IT/ERP systems also. Now the new CEO is an accountant and it looks like he is doing a sound job of getting the company back into stable financial position. But is he the right person to otherwise revitalise the company and get revenue moving in a positive direction?

The key question for shareholders is what good or harm would a change of Chairman and the appointment of a new non-executive director do? As the current Chairman has been there 5 years and the decline in the company over that period has been substantial, it surely would be beneficial to have a change in that regards. Would he still be there without the support of Phoenix? As regards the appointment of Alexander Anton, having a new independent view on the board can surely do no harm and might do some good.

So as usual in these kinds of circumstances, the prompt rebuttal by the board of the proposed changes does not appear positive for the future of the company when this writer remains to be convinced that all the issues are resolved.

Roger Lawson

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