Recovery postponed at Titon

Bad news in perspective

Diminutive window latch and ventilator manufacturer/distributor Titon made a far from titanic £5,000 operating profit in 2011. Courtesy of interest and a tax credit, net profit actually made it into the hundreds of thousands. Just.

Last year’s paltry profit of £400,000 was an improvement from recession-induced losses, which I hoped the company might build on but, according to chairman John Anderson, the economy and competition have seen to that.

The market for window handles, hinges, and so on is moribund because the number of new houses being built is still very low and we, and local authorities, are spending less on refurbishment.

Meanwhile demand for heat recovery ventilation systems is stronger because they’re increasingly specified in new houses, but competition is fierce. Titon believes a rival has infringed its patents and is going to the High Court to defend them.

Despite appearances, the situation is not desperate. Titon’s F_Score calculation demonstrates both its tiny size, and inner strength:

It’s still profitable, more so on a cash basis. It still has no debt. Net cash fell marginally due to investment from £3.1m to £2.8m.

The directors appear to be running the company prudently to steer it through hard times, cutting costs (it made 9 people redundant in 2011, or about 5% of the workforce) and maintaining research and development to stay competitive. In South Korea, where Titon has a factory, its joint venture is growing sales and, we can hope, profits will follow.

Prudence is to be expected. Anderson, Titon’s founder, owns more than 20% of the company so he has most to lose if he squanders its resources. Admittedly that’s not a colossal sum in absolute terms, about £800,000, because Titon’s so small and unloved.

It doesn’t sound like the makings of a rip-roaring investment tale but survival is all I require of Titon in the short-term, if, as my analysis will hopefully re-confirm, the company is trading below liquidation value.

The main reason for holding Titon, is not its dynamic prospects but its ridiculous cheapness coupled with its conservatism.