Toy-makers Hornby reports a slump in profits

Toy maker Hornby's dividend has come off the rails after annual profits plunged by a third due to the weakness of sterling and problems at its largest supplier of model trains - reports The Guardian.

The company, home to its eponymous model railways as well as Airfix, Scalextric, Corgi and Humbrol paints, is scrapping its payout to shareholders in an attempt to conserve cash.

It said sales were flat last summer as cash-conscious consumers held off spending, but sales in the second half of its financial year to end March were up 20%. Airfix and Humbrol sales continued to show good growth and the bulk of Corgi's sales were made in the second half, but Hornby itself could not get enough stock because of ongoing problems at Sanda Kan, its largest supplier in China.

Last year, Sanda Kan was hit by the cost of the mammoth debts it had accrued after being taken over by an American venture capital outfit four years previously. To protect its supplies, Hornby looked at possibly buying the business, incurring significant advisory costs in the process.

In January, however, the business was bought out by Hong Kong-based rival Kader, which is now trying to sort out the problems in the business.

Coupled with rising material costs and the fall of the pound against the Hong Kong dollar - in which it sources most of its supplies - the impact of the problems in China pushed Hornby's profits for the year to end March to £6.1m, down from £9m. Sales, in contrast, were up 11% at £61.6m.

To deal with its rising costs, Hornby has been raising prices but said that in view of the "challenging economic environment" and continuing currency fluctuations, "the board has determined that the primary focus of the business should be on maintaining a strong balance sheet." As a result, it has pulled its dividend payment to shareholders, having paid out an interim dividend of 2.7p at the start of the year.

"This has been a challenging year for Hornby," said chief executive Frank Martin. "As a result of the weak pound and continuing supply chain issues, our profits and margins have come under pressure."

He said the spread of the business had helped it maintain "sales growth against the challenging economic environment in all our key markets".

The company has also become a major partner for large brands, recently clinching an exclusive worldwide license agreement with the Brawn GP formula one team while Corgi recently extended its licence to make cars based on the James Bond 007 character.

"Consumer demand for our products has strengthened in the period since Christmas and continues to be strong despite the current economic downturn and is proof yet again of the resilience of our business," Hornby said.

The company has been on a major spending spree over the last few years, grabbing a large slice of the nation's toy boxes. Already home to Scalextric, it acquired Airfix and Humbrol paints in 2006 after the business went under. Then it snapped up Corgi just over a year ago.

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