Hornby, the model railways and Scalextric group, blamed the economic slowdown and problems with a key Chinese supplier for a sharp drop in profits that forced it to axe its final dividend.

The company, which also owns the Airfix, Corgi and Humbrol hobby brands, said that Sanda Kan, its main Chinese supplier of model railway equipment, had almost gone bankrupt last year because of the size of its debts after a takeover several years earlier by private equity.

Hornby tried to buy the business last year, incurring £221,000 due diligence costs in the process, before Sanda Kan was bought by a Hong Kong-based operator in January.

Frank Martin, chief executive of Hornby, said that the disruption to supplies had clipped sales by at least £3 million and taken at least £1 million from the bottom line. He told The Times: “We are continuing to work closely with the new owners to improve our supply chain performance. I can't say this is resolved, but we are in a better position than we were six months ago. I would expect to see the position improving. While it was a fairly difficult year, we have been working with three alternative suppliers of model railways in the last four years.” Mr Martin said that buying the supplier, which makes half of Hornby's kit, would have been a “great opportunity”.

Hornby reported a 32 per cent fall in full-year pre-tax profits, to £6.1 million, despite an 11 per cent rise in turnover, to £61.6million, on the back of higher Airfix sales and a first contribution from the Corgi business, bought in May last year for £7.6 million.

Mr Martin said that Hornby had been hit by a number of toy retailers pulling orders before Christmas. “We got some big cancellations from a number of retailers we had bought stock for and they didn't take it.”

He said that, while the collapse of Woolworths — previously Britain's biggest toy retailer — had initially hurt Hornby, it was now working in the company's favour: “Woolworths traded from more than 700 stores, but we were never particularly well stocked by them. Now people are having to go elsewhere, such as independent toy retailers, and that is working to our advantage. During the first three months of the year, the UK toy market was down 18 per cent — but we were up 13 per cent.”

Mr Martin said that the decision not to pay a dividend had been difficult but he was confident that most shareholders would be supportive.

Andrew Morris, the finance director, said that the company had been hedged against the US dollar for most of last year but that protection had now lapsed. He insisted that Hornby's debt levels, which rose from £1.3 million to £11.9 million after the Corgi acquisition, remained “acceptable”.

Mr Martin said that Hornby had signed an exclusive worldwide licence agreement with the successful Brawn Formula One team. The first ranges are due in the shops by Christmas.

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