Titon Holdings: Solid 2017 results, outlook good and still on 10x PE

Thursday, Dec 14 2017 by
9

Earlier this year, I stumbled across Titon Holdings (LON:TON), an illiquid family controlled micro-cap which looks conservatively managed, with most profits coming from Korea and in recent years has shown impressive top line and EPS growth.   In addition, it has a  2.5% dividend yield and the dividend is very well covered by earnings and dividends have increased steadily over recent years.    However, a slightly more than preliminary look revealed the complexity of the Korean corporate structure and it got put in the too difficult bucket.    However, I had a spare day recently and decided to go through some accounts and I felt reassured enough to buy some shares.   But the stock has minimal research coverage (Hardman) and I was still uncomfortable enough to wonder if there was something I was missing.   Hence this post and I would be grateful if anyone who understands the stock can add a comment on any points I have overlooked.

Titon Holdings is a UK micro cap, producing passive and mechanical ventilation on a P/E of 10x, with just under 20% of the market cap in net cash and this year a 20% increase in the dividend.   Today the company came out with full year FY 2017 results (end-Sept) which included a fairly upbeat outlook statement for FY2018.

Titon’s business is dependent on the housing market (particularly new builds) and therefore is cyclical and following the 2008 crisis profits collapsed.   Most of its business has traditionally been in the UK, with some exports into Europe and a small US business.    But in 2008 it also started a joint venture in Korea, which has been a real success and now accounts for over half of the profits of the group.    Despite the geopolitical issues, the South Korean economy is also forecast to have quite strong growth over the next few years.

The joint venture structure in Korea is quite complex.   

Titon Holdings Plc owns 51% of Titon Korea Co Ltd.    Titon Korea, which is fully consolidated, manufactures passive ventilation products and sells effectively all its production to Browntech Sales (BTS), which is 49% owned by Titon Holdings plc.   The other 51% of BTS is owned by South Korean investors who have operational control of BTS.  BTS distributes ventilation products in South Korea and recently has started also investing in and developing schemes in the South Korean residential real estate market (Seoul).   The large minority interest plus the large associate makes the consolidated accounts somewhat difficult to understand.  Outside Korea, all subsidiaries are 100% owned.  

There is an interesting interview with Keith Ritchie (Executive Chairman) with John Lee from March 20017 on: https://audioboom.com/posts/57...

 

  My summary of the positives:

·          Cheap:  P/E around 10x, EV/EBITDA around 5x; Price to NTAV around 1.1x.

·         Dividend yield around 2.5% and dividends have been growing rapidly (2017 div up 20%).  (In 2006 – pre-crisis, the company paid out a div of 7.1p with EPS of 6.4p).  

·         Cash position of £3.3 million (Sept 2017).

·         2017 results were good and these were held back by a £370k write down from closing down a new venture to fabricate commercial ducting.  

·         Company is conservatively managed with historically a net cash level.   Since the company listed, it has not raised funds in the market.

 

My Summary of the Negatives:

·         Illiquid:   outside the board and large holders there are around 4.5 million shares.  Bid -offer spread around 5%.

·         Lack of transparency/ complexity in analysing cash flows because of minority holdings in Korea, with Titon Korea and Browntech Sales.

·         Cash flow conversion in recent years has been poor.   Growing profits has mainly been invested in the balance sheet – in particular Working Capital increased by £3.8 million (September 2013 to March 2017), of which £1.9 million is related to increase receivables from Browntech Sales.   H2 2017 cash flow generation was better.

·         Given that a key driver is the number of new build homes, the business is cyclical.    In 2012, the company had a £720k loss and a £1million cash burn.   In 2007/8 and again in 2011/12, the dividends were cut sharply.

·         There is large exposure to Korea – given this is a robust economy this is probably a good thing but North Korea tensions are a negative.

Note:  As mentioned in the opening paragraph, I own shares in Titon.


Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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Titon Holdings Plc is a United Kingdom-based supplier of ventilation systems and windows hardware. The Company operates through four segments: United Kingdom, South Korea, North America and All other countries. The United Kingdom segment includes sales of passive and powered ventilation products to house builders, electrical contractors, window and door manufacturers. The South Korea segment includes sales of passive ventilation products to construction companies. The North America segment includes sales of passive ventilation products to window manufacturers. The All other countries segment includes sales of passive and powered ventilation products to distributors, window manufacturers and construction companies. The United Kingdom segment supplies window and door hardware. The Company offers trickle ventilation and window and door hardware products, and mechanical ventilation products. The Company's manufacturing base is located at Haverhill. more »

LSE Price
190p
Change
 
Mkt Cap (£m)
21.1
P/E (fwd)
9.7
Yield (fwd)
3.0



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6 Posts on this Thread show/hide all

Fegger 17th Dec '17 1 of 6

Always interesting to find out about a new (to me )share rated on a stockrank of 90 and above. I would however be put off by the drop in earnings forecast by the broker from July onwards

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Wimbledonsprinter 17th Dec '17 2 of 6

In reply to post #255458

Fegger

As far as I am aware, given the illiquidity, Titon only has the one broker covering it - Hardman (and this is paid Corporate research). In May 2017, following Titon's interim results Hardman reduced its FY2017F EPS from 14.1p to 13.6p and its FY 2018F EPS from 15.6p to 14.6p (as Stockopedia show happening in July - I think the data feed was a bit late on the uptake).

In its prelim results (announced on Thursday), Titon reported a 16.5p EPS for FY2017 (so comfortably ahead on the forecast). Hardman publishes its research freely on its website (its style is a bit breathless for my liking). I see that it has just updated its research over the weekend (although dated tomorrow, Monday) and now is forecasting FY2018F EPS of 17.9p. Research is available at:

http://www.hardmanandco.com/docs/default-source/company-docs/titon-holdings-plc-documents/18.12.17-over-the-moon.pdf

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iwright7 18th Dec '17 3 of 6

The Hardman forecast equates to a PE of 8.9x for a company whose overseas earnings are growing and has produced an 2017 Earnings Surprise - Boring product, under the radar and improving metrics - A StockRank archetype?

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Wimbledonsprinter 20th Dec '17 4 of 6

I see the Stockopedia data feed has now incorporated the FY18 EPS upgrade to 17.9p from Hardman on its earnings expectations graph - and has corrected/ backdated the Previous EPS cut (15.6p to 14.6p) from July to May.

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daveinthelakes 8th Feb 5 of 6

In case you were not aware Titon Holdings (LON:TON) was put up last Friday by Simon Thompson of IC as one of his ten bargain shares for 2018. I thought it was one of the better selections but confess to worrying about the UK housing market if Brexit negotiations go wrong and the oddball relationship of the Korean element. It looks like they are now in part a Korean property developer?

The shares shot up on Thompson publishing but I got some in the market blow off on Tuesday. Can't decide if to keep them now.

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Wimbledonsprinter 5th Jun 6 of 6

I understand Titon will present at Mello South (Hever) next week.

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