Titon plc
The construction industry is notoriously cyclical, and isn't exactly helped by a pandemic. Titon plc is an AIM listed manufacturer of ventilation systems. It
derives 74% of its sales of GBP 27m from old-fashioned trickle ventilation
systems and the balance from newer mechanical ventilation systems.
The last insider purchase was by a newly appointed non-executive director for 14,924 shares at a price of 134p - well above the current market price of 84p.
The company serves the UK (55% of sales) and Korean markets
(30% of sales) along with the EU and US. It holds a dominant 75% share
of the Korean market in trickle ventilation systems and this is reflected in a
14% pre-tax margin in Korea versus under 6% in the UK. The company holds 51% in
its Korean subsidiary and a 49% stake in its primary distributor there.
Management reported a decline in sales in the year ended
September 30th, 2019 and the business has faced headwinds ever since. The Korean market is challenged by government policies to restrict
lending and construction activity. In addition, higher pollution levels are
raising demand for mechanical ventilation systems. The UK market is beset by generally weak demand and stiffer
competition.
This has depressed the share price to near the net working
capital value for the stock (a proxy for liquidation value) of GBP 8m – represented largely by cash of GBP 4.5m.
Other tangible assets buffer up the book equity to GBP 16m (excluding the non-controlling interest of GBP 1.5m).
The company generates about GBP 2m in earnings and GBP 1.5m
in free cash flow every year. It pays regular dividends, which increased to GBP 0.5m last
year. This represents a trading multiple of 4x earnings and a nearly 6%
dividend yield.
The last insider purchase was by a newly appointed non-executive director for 14,924 shares at a price of 134p - well above the current market price of 84p.
Covid-19 has forced a halt to the UK operations but the
Korean operations continue as before after a clean-up. The company appears to have sufficient staying power after bills are paid.
This appears to be a case of depressed sentiment taken beyond the realms of ordinary business judgment - providing sufficient value to investors purchasing shares near the current market price.