Colchester-based Titon (TON:188p), a small-cap designer and maker of domestic ventilation systems, and door and window hardware, has justified my call to include the shares, at 160p, in my 2018 Bargain Shares Portfolio.
In the 12 months to the end of September 2018, Titon’s revenues increased by 7 per cent to a record £29.9m, all of which was organic growth. Moreover, with gross margins rising by almost one percentage point to 26.8 per cent, and growth in sales outpacing operating costs, this fuelled a 20 per cent rise in pre-tax profit to £3m, to deliver a 16 per cent hike in earnings per share (EPS) of 19.2p.
Robust cash generation was another feature. Net cash of £1.8m generated from operations after working capital movements and corporation tax paid enabled the company to invest around £900,000 in capital expenditure and still have enough surplus cash flow to cover the £531,000 cost of declaring a 13 per cent rise in the dividend per share to 4.75p. This was the sixth consecutive year that the payout has increased. Year-end net cash increased by £150,000 to £3.4m, a sum equating to 18 per cent of net assets. Titon also edged up its return on capital employed (ROCE) to 15.3 per cent. A capital turn ratio of 2.1 (as defined by dividing annual revenue by capital employed) highlights an efficient use of capital, while a quick ratio (current assets less stocks divided by current liabilities) of almost two indicates strong liquidity.
It’s worth noting that UK operations accounted for £1m of operating profits, up from £706,000 the year before, buoyed by sales of Titon branded door and window hardware, export demand for mechanical ventilation systems, and sales into the aluminium door and window sector segment. The South Korean operations had another bumper year, with operating profit up by more than a quarter to £2.08m, buoyed by 51 per cent-owned South Korean subsidiary, Titon Korea, a maker of natural window ventilation products that has a 75 per cent share of the national market. It contributed £1m to Titon’s post-tax profits of £2.6m. The company’s other South Korean associate company, Browntech, increased net profits by almost a quarter to £778,000. It invests in the residential real estate market in Seoul and has three schemes on the go. Browntech also distributes ventilation products in the country.
Chairman Keith Ritchie notes that trading in October and November is in line with the same period in 2017, both of which were particularly good months. Analyst Tony Williams at Hardman & Co is predicting pre-tax profit of £3.2m on revenue of £30.2m in the 12 months to the end of September 2019. On a price-to-book value of 1.1, historic PE ratio of below 10 and offering a dividend yield of 2.5 per cent, the rating is hardly punchy for a company with exposure to South Korea, the 11th-largest economy in the world, and one that has proved adept at navigating through a more subdued domestic construction market in the UK. Buy.
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