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OPINION

Titon’s robust first-half performance

Titon’s robust first-half performance
May 23, 2019
Titon’s robust first-half performance

Adjusted EPS increased by a fifth to 8.86p and with closing net cash up by 40 per cent to £3.84m (35p a share) year on year even after taking into account a £181,000 charge for an aborted acquisition, the maintained interim payout per share of 1.75p was covered almost five times. An annualised post tax return on net assets of close to 20 per cent and an asset turn ratio of 2.2 times (calculated by dividing net revenue by net assets) highlight the impressive returns the company is making on its invested capital, while a quick ratio above two times (calculated by dividing current assets-less-inventories by current liabilities) demonstrates ample balance sheet liquidity to meet its obligations.

The slowdown in South Korea reflected both a fall in new housing starts and intensification of the virulent dust-based air pollution, largely from China. The latter effect meant that demand for mechanical ventilation units rose at the expense of natural ventilation products, Titon Korea being the market leader in the latter market segment. As a result first half revenues from its two businesses in the country declined from £5.4m to £4.8m, but with overheads reduced, too, divisional pre-tax profits actually rose by a fifth to £864,000, accounting for two-thirds of the group total.

To address the structural shift in this key overseas market, chairman Keith Ritchie says that Titon’s South Korean partners are developing mechanical units and new natural ventilation products with a much higher level of filtering to deal with the intensity of the dust-borne pollution. These will be launched early next year. Mr Ritchie also anticipates a modest return to growth in new housing starts over the coming years, and notes that South Korean government expenditure is rising and is serving to replace some private equity activity.

Although operating profit from Titon’s UK operation dipped slightly to £461,000 on revenues up 4 per cent to £7.4m, this was a solid performance in light of the cloud of Brexit hanging over the UK economy. Moreover, a reorganisation of the domestic sales force is starting to have an impact. Mr Ritchie also flags up that the UK government has announced a review of building regulations concerning ventilation, as part of its response to the Hackitt report following the desperately tragic Grenfell fire. A consultation paper is due to be issued over the summer and any change in regulations may create new opportunities for Titon. Indeed, it’s clearly in the government’s and the industry’s interest to make buildings safer, more sustainable and healthier.

Analysts are maintaining expectations that Titon should still report full-year EPS of 16p (18.2p restated in 2018), which covers the annual dividend of 4.75p a share more than 3.3 times. This year’s dip in earnings explains why Titon is trading in line with the buy-in price and is one of the laggards in in my market beating 2018 Bargain Share portfolio which has now produced a total return of 19.6 per cent since early February 2018, a 28.6 percentage point outperformance of the FTSE Aim total return index.

2018 Bargain shares portfolio performance
Company nameTIDMOpening offer price on 02.02.18 (p)Latest bid price 15.05.19 (p)Dividends (p)Total return (%)
Sylvania PlatinumSLP14.531.50.35119.7
ParkmeadPMG3763.4071.4
PCFPCF27330.4924.0
MpacMPAC15617009.0
Crystal AmberCRS207.222058.6
Shore CapitalSGR213210155.6
U and I GroupUAI20517817.9-4.4
TitonTON159.861454.75-6.3
ConygarCIC1601460-8.8
RecordREC43.330.52.8-23.1
Average    19.6
FTSE All-Share Total Return index70887228 2.0
FTSE AIM All-Share Total Return index11841077 -9.0
Source: London Stock Exchange share prices.

However, priced on a modest cash-adjusted forward price/earnings (PE) ratio of 7, offering a dividend yield of 3.2 per cent and rated on a price-to-book value of 1.05 times, I maintain the view that prospects of Titon returning to growth in the 2019/20 financial year are being very underrated. Buy.

■ Simon Thompson's new book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.