Titon buying opportunity

As analyst Tony Williams at equity research firm Hardman & Co rightly points out, the UK construction sector is not having a banner year. According to Experian data, activity is set to fall by 2.1 per cent in real terms, driven by falls in public building and commercial work. However, Mr Williams also points out that: “Titon’s core domestic sector is housebuilding, where private output is forecast by Experian to rise by 3 per cent this year and next, with public output flat in 2018 and returning to growth of 3 per cent in 2019.”

Operating as a leading supplier of background ventilators in a market where air tightness standards for buildings is supported by changes in UK building regulations, Titon offers low-energy mechanical ventilation systems and a comprehensive design service to its customers. Pre-tax profits from this part of the business increased by a third on an underlying basis to almost £0.5m in the six months to end-March 2018, although this was a reflection of margin rather than revenue growth. Titon’s UK business should be holding up pretty well.

Furthermore, the company has eastern promise through a 51 per cent-owned South Korean subsidiary, Titon Korea, a manufacturer of natural window ventilation products and one that controls a 75 per cent share of the national market. Representing 40 per cent of Titon’s first-half turnover of £14.5m, revenue here surged by a quarter in the six-month period. It’s only reasonable to expect Titon Korea to post decent growth in the second half too as demand is being driven by multiple factors, including: the introduction of building regulations for ventilation which specify that new houses and apartments have to be adequately ventilated; preference for the use of natural ventilation products over mechanical ventilation by major South Korean social housing authorities; and the adoption of natural ventilation products by the private housebuilding sector in order to reduce construction costs.

Titon also owns a stake in an associate South Korean company that distributes ventilation products, and generates additional revenue through residential property development activities in Seoul. Combined, the South Korean operations reported a pre-tax profit of £1m in the first half. South Korea, the world's 11th-largest economy, is forecast to grow by 2.9 per cent this year and next, so the economic backdrop is favourable at a time when the geopolitical backdrop is improving.

The point being that Titon looks on course to deliver the 17 per cent growth in pre-tax profits, to £2.9m, forecast by Mr Williams at Hardman & Co for the 12 months to end-September 2018. On this basis, expect earnings per share (EP)S to increase by 9 per cent to 18p and support an eye-catching 16 per cent hike in the annual dividend from 4.2p to 4.9p a share. Net cash on the balance sheet was around 25p a share at the end of March 2018 and is expected to increase to 33p by the 30 September 2018 financial year-end. This means that Titon’s shares are effectively being valued on a price/earnings (PE) ratio of 7.6 after stripping out net cash, offer a 2.9 per cent prospective dividend yield, and are priced in line with book value. In my book, that represents value and the significant upside to my 240p target price is worth exploiting. Buy.

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