I first bought Titon in September 2013 at 37.9p. The shares have produced a return of 86% so far (including dividends proposed). A couple of weeks ago they reported very good results producing earnings per share of 8.52p.
The questions are: has the share price got ahead of itself at 67p? Or, can I safely buy more? Is there enough margin of safety?
The report I wrote (and posted on my personal website) in September 2013 provides the background – I’ll reproduce it in the next two newsletters and then add the most recent data and analysis.
My September 2013 analysis
Titon, manufacturers of house ventilation products ranging from simple ducts to heat recovery systems [plus door and window handles and lock mechanisms], has a balance sheet which suggests a net current asset value investing (NCAV) bargain.
However, we need some reassurance with regard to (a) the industry economics, (b) managerial quality, and (c) financial stability.
Market capitalisation is £3.9m at a share price of 39p.
The interim results to March 2013 show inventory of £3m, receivables of £3.2m and cash of £2.1m.
There is no bank debt and only £3m of payables and £0.2m of deferred tax to deduct to arrive at NCAV of £5.1m.
Even if inventory and receivables are marked down as suggested by Graham M.Cap is less than NCAV.
Also consider that £3.3m of property, plant and equipment is shown in the BS, over £2m of which is freehold land and buildings.
No pension deficit.
Titon operates in a very competitive industry and I see no reason for this to change. There is easy industry entry by new firms and little customer captivity. It is largely a commoditised sector.
This is reflected in the poor profits over five years: roughly breakeven on average.
However, even commoditised sectors can improve and allow leading players to raise ROCE to an acceptable (or even above acceptable) level in a rising demand situation.
The highly cyclical house building and construction sector may allow this to occur over the next three years or so.
In addition, Titon have developed products (R&D budget of c. £400,000 pa) for the whole house ventilation with heat recovery market.
This is likely to be a growth sector as building regulations get ever tighter regarding air-tightness (buildings are almost air sealed, therefore oxygen has to let in from somewhere; opening a window seems wasteful so heat-exchanged fresh air makes sense for many (currently too expensive to install for the houses I’m building though).
There is a high degree of free entry to even this industry, but at least Titon are established.
The recent improvement of the company’s fortunes in its overseas markets might indicate what happens to profits in an economic upswing to commoditised cyclical business.
In tomorrow's newsletter I'll look at managerial quality, financial stability and ask what might have caused a rise in share price (as at September 2013). Then, in future newsletters I'll outline my new analysis, with an emphasis on sources of Titon's profits.