A bargain, however you calculate it
A classic net-net
This is the reason to hold Titon: The market has given up any prospect of recovery. The share price values its assets at 30% less than my guesstimate of their valuation in liquidation.
Disengaged investors could be right. If you look at the window handle manufacturer’s record, competition was eroding Titon’s profitability before two years of losses due to recession, and now a nascent recovery has faltered.
Faced with vertiginous charts like Titon’s you really have to believe companies can pick themselves Rocky-like from the floor before the final body blows thunder down from their competitors and the bell tolls.
Let’s say Titon recovers. The economy picks up, house building gathers momentum, the South Korean joint venture profits, or something unforeseeable and unexpected happens, its founder decides to sell up, say, and somebody wants the company. Then, we’re in the money, as long as the Thrifty 30’s still holding.
There’s one big ‘if’: the meantime. Until then Titon must husband its resources instead of splurging on unprofitable investment or sustaining heavy losses. If it does, it will eat into the assets that make it look so cheap, most notably nearly £3m in cash. In other words, the rot must have stopped in 2009.
I’ll return to these issues when I finish the script. Meanwhile, here’s a guesstimate of liquidation value. It’s a guesstimate because it’s based on values from a seventy year old textbook that I believe to be conservative, but have never seen tested in an actual liquidation. And it’s a rough guesstimate because it ignores some of the costs of liquidation, like redundancy, for example.
The interesting thing about Titon’s valuation is that the market price is not only a third less than the conventional net current asset calculation valuation invented by Benjamin Graham (current assets less all liabilities) it’s also nearly a third less than its liquidation value (taking into account all tangible assets, but discounting them to arrive at a more realistic price, bearing in mind the company would be a forced seller).
The conceit of the net current asset value calculation is that although net current assets are unlikely to be worth balance sheet value when they’re liquidated, a company will probably have sufficient fixed assets, ignored in the calculation, to make up the difference even though they’re likely to be worth much less in a liquidation than book value.
These days, that may not be true. For example, companies often prefer to lease premises, which are assets and liabilities not recorded in balance sheets and therefore not factored into the ratios. Bring them back onto the balance sheet and they can annihilate the valuation (which is one of the reasons I must question French Connection’s status as a net current asset value bargain).
Titon owns property, though, which I’ve valued at 50% of book value, so maybe it’s the kind of company Graham was looking at all those years ago.
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Hi Richard. I think that we have become quantumn entangled as I’m just in the process of writing a piece on Titon. They are the latest addition to my 21st century net-net portfolio, which isn’t a huge surprise since they’re one of the only TRUE net-nets in the main market.
They might seem amazingly boring and destined for mediocrity, but the share price doubled in about 18 months on the back of the weak recovery into 2010, so it won’t take much to send them whizzing back up again in my opinion.
Although my portfolio does have a fixed 5 year holding period (but that won’t be the case for the early holdings for technical reasons… it’ll be more like a year and a half).
I’ve also owned Titon personally in the past which you might remember, so they’ve certainly been around these here parts on and off for a while!
I also saw another blogger talking about them but can’t remember which one off hand. For such a small company it does seem to generate a lot of interest among us deep value fans.
Reply to self: What I meant when I mentioned a 5 year holding period was that I can’t take advantage of any quick share price movements (quick as in less than 5 years!) while I think that you’re fleet enough of foot to do just that.
Well I’m not sure about that. My French Connection experience suggests the opposite! However in principle I’m prepared to hold for at least three years and probably five but if the share shoots up before then and achieves what I consider its potential I hope to offload it and recycle the money into a better value company. That’s the theory. The implementation has been far from perfect.
Hi John, thanks for your comment, I’m losing count of the number of times our paths have crossed when we’ve been thinking about Titon and I agree, it’s a true net net.
Looking at the net-nets remaining in the Thrifty 30 (some, like Holders Technology have appreciated their way out of net-net territory) I have my doubts about whether they strictly qualify. I’m concerned about French Connection’s leases as I say in the post. And Northamber is looking to me more and more like an old fashioned value trap. Every time I speak to somebody involved in supplying or buying IT to/for small and medium size businesses they say they just go down to PC World and buy it, or buy it straight from Dell. The role of the distributor seems increasingly anachronistic now that most things ‘plug and play’. In other words the business model may be defunct.
Oh! And Nate of Oddballstocks owns Titon: http://www.oddballstocks.com/2011/06/titon-holdings.html
Their factory at Haverhill is just down the road from me, and that’s where they are holding the AGM, so I might just turn up!
Richard,
Great post, Titon is still burning a hold in my portfolio. I’ve kept up with the interim results but haven’t done much else since. Your post got me thinking, I need to re-evaluate and maybe average down a bit. I think I’m sitting on a paper loss of 40% or so, 30% for Titon and 10% on the Pound.
I know Titon has been nothing but bad news from the market’s perspective which has killed the share price but I find some optimism amongst the bad reports. The company is still profitable (just a sliver above zero), and they haven’t burned through the cash yet. I seem to remember that the CEO owned a nice stake as well. I think the company is just in survival mode hoping to hang on for a recovery.
One other thing investors might have against it is that they seem to be paying dividends out of their cash since earnings don’t cover the dividend. I know as a rule of thumb this is a big no-no for investors. I actually have a different perspective, for a net-net that’s profitable I’m very comfortable if they’re paying back the cash. In a way the company is slowly liquidating and by returning the cash to shareholders slightly reducing the possibility of a really bad merger or acquisition.
I’ll be interested to see your other posts in this series.
Have you ever looked at ARGO? They are a true UK net-net as well, I wrote about them in July, and Wexboy wrote about them a month or two ago. I’d be interested in hearing your thoughts.
Nate
Thanks Nate, and I agree with you about the dividend – it’s tantamount to liquidation. Same with Northamber.
I haven’t looked at ARGO. It’s an investment company and I don’t invest in them on principle (the principle being a rather simplistic one. I like to do my own stock picking)
Richard,
Regarding ARGO they are an investment company in a way. They run and manage emerging market fixed income hedge funds. The company itself owns a bit of the main fund but otherwise their only exposure is through the change in AUM.
I also ended up picking up more Titon shares this morning. I read through their annual report and cash flow was impressive (mostly due to depreciation) against profitability. I also noted the potential for a gain due to the patent infringement lawsuit they filed this year. Overall this company is too cheap to ignore. Management has options with strikes prices in the 40s up to 100p a share so there’s some incentive to get things moving.
Nate
Re: Argo yes but assets under management depends on how good they are as investors, and on how good emerging markets are.
Titon just issued a trading update. Project delays in South Korea, hopefully that’s temporary, and a tiny uptick in the UK with the possibility of more if the initial reports of increased housebuilding turns into a trend. Realistically, that’s the catalyst isn’t it, more houses being built.
One thing I’d like to know is the % of sales from “window furniture” vs ventilation systems.
I saw the trading update, I guess that’s the reason for the 8% fall. I would say that the market has priced in the bad news, and has overshot to the downside quite a bit.
Management owns 20%, I saw that a fund purchased 20% along with two individual investors purchasing 10% each. So 60% of the float is now locked up by investors who have longer term outlooks for Titon. Compound this with a thinly traded stock and you have an opportunity for wild price swings. Interestingly enough in the annual report was a comment that two execs declined to participate in the stock option plan. I wonder if they just didn’t want options or they took cash instead.
I have to be honest, I’ve never seen these products in the US. I’ve gone on Titon’s site and tried to figure out exactly what they sell but I always come away thinking “must be a European thing”. I do a lot of home improvement stuff and I’ve never seen a window in the US with a vent system like Titon sells in any DIY store. If someone wants airflow they’d just open the window a crack. Are these system for windows without screens so that bugs can’t come in?
Usually in buildings with windows that don’t open they just leave the AC or heat on at an average temperature year round. Are these vents popular products in the UK? Apparently someone is buying them with £12m sold last year by Titon. Our home’s windows are make out of wood with the glass held in by a strip of metal.
Most older homes (built before to 1960 or so) in the US are actually even more rudimentary, they are a wood frame with usually six panels on each half. The glass sits in the panels and is glazed in placed. In all cases these windows open unless they were painted shut. The upper half is stationary and the lower half slides up and down. In college I did home repair work and we dealt with a LOT of windows like this. I have re-glazed many more old homes than I wish to remember. If the glass is ok and the windows are repainted and re-glazed every ten years or so the windows can hold up almost forever. Our own windows are from the mid-80s or so and when we purchased the house the inspector commented on how they were “newer and should last a while”.
Anyways I realize my comment went very far down a rabbit trail.. I’d be interested to know if a lot of UK homes include these vent things in their windows. The difference must be a cultural thing (I hope, maybe they aren’t popular over there either!).
Nate
Hi Nate, my windows have vents at the top – they look just like Titon’s Trimvents. I think some sort of ventilation is required by building regulations to ensure air quality and energy efficiency. Recent legislation seems to be driving change from passive ventilation in the windows to mechanical ventilation systems. This is a summary from one of Titon’s rivals Vent-Axia: http://www.vent-axia.com/legislation/building-regulations.
And these, are the regulations: http://www.planningportal.gov.uk/uploads/br/BR_PDF_ADF_2010.pdf
Haven’t read ‘em!
Very few British homes have air conditioning – put it down to generally unimpressive summers…
This is a very common American style window: http://www.clearwindowatlanta.com/wp-content/gallery/windows1/window-sash_01.jpg
The bottom portion moves up and down while the top is stationary, so no need for a vent.
The windows with vents in the top are common in Europe, my parents have them as well in the house. The idea is that it allows in fresh air while you don’t have to open the window, something you don’t really want to do when it’s cold outside. But modern houses/buildings are often so well isolated that there needs to be some way to get fresh air in the building.
Thanks Hielko, at least I’m not the only one with them then!
I wonder if the property values could be worth more than the book value? Have anyone looked more closely at their properties and the potential values?
Hi Petter, I haven’t but the annual report says:
“The Directors do not consider that there is any significant difference between the market value of freehold land and buildings and their net book value, as shown in the financial statements.”
Richard,
If you go to the AGM let us know your thoughts! would be much appreciated
tks
At the moment it’s touch and go whether I go because of other commitments, but if I do, I will surely report back some impressions. It would be nice just to see some of the products in the showroom!