Titon's Korean business has been doing great, but not is all lost in the UK, by any means.
Korea appears to make almost 100% of the profits. But, it is not quite as simple as this. In the breakdown of revenues and expenses the UK unit has to absorb all of the annual spend on depreciation of fixed assets and amortisation of intangible assets. In 2014 this was £530,000.
Actual expenditure on new fixed capital items was only £386,000. A case can be made for allocating a greater proportion of these expenses to Korea operations. Thus UK profit starts to look a bit more respectable - and that is before economic recovery takes hold in the UK.
(UK revenues account for 60% of turnover, with 19% of its UK factory’s output being exported).
But they are a long way from acceptable returns on capital employed, even though there are glimmers of light: ‘the underlying trading performance in the UK has improved in the second half, where we have made a small profit after a number of months of making losses’ (2014 prelims).
While there has been some growth in the UK market for replacement door and window handles, hinges, locking mechanisms and trickle vents, it is still ‘well down on pre-banking crisis levels’ (2014 prelims).
They sell this hardware mostly by getting builders, architects, building services engineers and local authorities to specify a Titon product. Where specification is not possible they sell directly to electrical contractors, installers and window fabricators.
A vital aspect of its business has been badly affected by tight government purse-strings on local authorities and housing associations. They tend to be the main customers for Titon’s mechanical house ventilation products.
The mechanical ventilation heat recovery business has also been held back by the limited force of regulations to hyper-insulate houses and by the lowered demand from local authorities and housing associations. However, this business still has long-term potential. But, then, there are a lot of competitors.
A closer look at the Korean business
Compare this with the UK planning system: building approvals for new homes at a rate of over 500,000 per year. The Home County NIMBY would be apoplectic if that was the rate in the UK.
Titon is finding that Korean builders are switching from mechanical ventilation, which it does not sell over there, to window ventilation, which it does sell.
While the excellent profit numbers for Korea are built on simple passive ventilation products, there is a plan to sell other products from its large range in the future.
However, there is a large negative – that dreaded word, competition: ‘In Korea we anticipate a slower rate of growth than we have seen in the last two years as there is more competition in the natural ventilation market’ (2014 prelims). Hmm, this is the main profit driver, at least until the UK gets off its backside.
In tomorrow's newsletter I'll take a fresh look at the balance sheet and highlight some dangers.