A two minute monologue

What it does: window furniture and ventilation systems

Titon manufactures (67% of 2011 turnover) and distributes window handles, hinges, vents, locks, and home ventilation systems. It has factories in Suffolk and South Korea. Its main market is the UK (80% of 2011 turnover). It also sells in Northern Europe and South Korea through a joint venture with a local distributor.

Category: asset/cyclical

Demand fluctuates with the demand for new houses, hospitals, schools, and commercial buildings as well as replacement and refurbishment by privately owned householders and local authorities. With the housing market moribund, and government spending constrained, Titon's in a down-cycle.
When demand recovers, so should Titon, but the shares are so cheap recovery may not be required. The shares may be worth less than the value of the company's assets in liquidation.

What needs to happen

Titon is barely making a profit so it needs to raise profit margins by increasing sales and/or cutting costs while it waits for the economy to pick up. It's:

• Maintaining research and development, particularly in its ‘market leading’ mechanical ventilation heat recovery systems, which are required as homes become more air-tight due to building regulations.
• Defending patents granted on its ventilation systems, allegedly infringed by larger rival Nuaire.
• Investing in its South Korean joint venture. Revenues from South Korea have gone from zero to more than ''2m (14% of total sales) in two years.
• Still controlling costs. Nine employees, or about 5% of its workforce, were made redundant in 2011.

What could go wrong:

competition
The biggest risk is competition. Window furniture is a commodity business, and it remains to be seen whether Titon can defend its patents and keep innovating as competitors flood the market. Nuaire is expanding its heat recovery range. Turnover was suffering, and Trident was reporting over capacity, in 2003, well before the credit crunch caused a collapse in house building. Other competitors include Villavent and Vent-Axia, which look larger and more diversified to me.Even so, I think the risk it will be out-competed before the market recovers and/or investment in R&D and South Korea delivers significant profit is mitigated by experienced management and sound finances…

In January 2012, Titon reported a 13% reduction in South Korean output due to project delays.

management
Chairman, John Anderson founded Titon in 1972 and owns about 21% of the company so his long-term commitment and experience of prior cycles is reassuring. Although the contraction of the business is a sign of weakness, management acted promptly to downsize and increase its cash buffer in 2008, perhaps in the long-term interests of shareholders. In 2007, Anderson sacrificed his own dividend so Titon could pay a higher dividend to other shareholders.

company finances
Titon has no debt, and net cash of about ''2.4m giving it a modest buffer against possible future losses and the ability to continue investing while profits are low. Net cash has fallen from over ''3m in 2010, but its still higher than its pre-crisis level of ''1.7m in 2007.

valuation
Assuming Titon survives and eventually recovers, there’s very little risk in the share price. It’s about 30% below current asset value and my estimation of liquidation value, making it a classic Ben Graham bargain stock.

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I added ''1,000 worth of shares at 34.8p a share on Monday morning, the actual price quoted by my broker, after deducting ''10 in fees and ''5 in stamp duty. The Thrifty 30‘s total investment in Titon is worth about ''1,800.

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More on Titon.