The final part of the analysis I carried out in September 2013 is shown in this Newsletter. As you can see I was reasonably positive on the qualitative factors, but my main reason for buying at 37.9p was because of net current asset value was significantly greater than the MCap.
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 the recession, costs were cut and senior managers/directors pay was restrained with the highest paid director receiving £108,000 pa: not evidence of scamming the shareholders there.
A younger team of directors is now leading the company with advice from the founder and other old hands.
All the directors have many years of experience in this industry in this firm. The CEO joined in 1988, joined main board in 1997 as FD, becoming CEO in 2002.
While over the past five years the combined record is merely break-even, the company stayed sufficiently financially strong and cash generative to pay for over £1m of dividends, £0.5m of new computer equipment and £0.4m pa of R&D.
And yet, throughout this period Property, Plant and Equipment only declined from £4.4m to £3.5m, cash declined from £2.6m to £2.1m, net current assets (as defined by firm) declined from £5.8m to £5.1m, and shareholder’s funds declined from £10.2m to £9m.
If this managerial team are simply managing decline then this has to count as very slow decline – and at a time of enormous general economic pressure.
With no debt other than payables and a very high NCAV this company does not seem like a candidate for solvency or liquidity trouble. Profits (or rather break-evenness) is also stable.
WHAT MIGHT CAUSE A RECOVERY IN SHARE PRICE?
(a) General economic/industry improvement? Most likely of the four.
(b) Managerial turnaround? Possible. Still investing in innovation. Still cost cutting. Korea and other overseas performances are encouraging.
(c) Takeover? Possible (management control around 40% of shares)
(d) Liquidation. Unlikely
(1) Will margins recover?
(2) Will cash/NCAV/shareholder equity remain on a downward course year after year while directors continue to offer jam tomorrow?
(3) Will they be competed out of existence by a bigger beast in the industry?
In the Boxing day post I'll start the updated analysis I conducted last week. I hope you are ready for a tricky (just a little) accounting lesson.