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Titon (LSE:TON) reported excellent results last week. Since I bought into it at 37.9p in September 2013 it risen to 93p. If you include dividends it’s grown to 2.5 times my investment.
It was a classic Net Current Asset Value investment back in 2013 – much neglected and unloved. But it had an able management team, not terrible positions in its markets and a very healthy balance sheet.
After a 154% rise it is time to ask whether this share should be sold, simply held or whether more should be bought.
The answer depends on the prospects for the business from this point forward.
A brief recap on why I bought in 2013
(for more detail see earlier Newsletters 23rd, 24th, 26th, 29th, 30th, 31st Dec 2014)
The September 2013 buying price gave a MCap of £3.9m, but the company had £3m of inventory, £3.2m of receivables and £2.1m of cash.
The only liabilities were £3m of payables and £0.2m of deferred tax (note: no debt or pension deficit). When these liabilities are deducted from the current assets we had a Net Current Asset Value, NCAV, of £5.1m.
On top of that it had £2m of freehold property.
The issues upsetting investors were (1) mere breakeven over five years, and (2) poor industry economics in its chosen markets.
•The passive ventilation products (e.g. trickle vents in windows) had few barriers to entry and many competitors
•The window and door hardware products suffered likewise from few barriers to entry and competitors
•The whole house mechanical ventilation with heat recovery, MVHR, products were slightly more differentiated, but expensive and quite a niche product. This division might do well as legislation to make houses airtight catch on across Europe.
The UK and European housing recessions had pushed down profits, long acknowledged as highly vulnerable to the economic cycle. The first two product areas, at least, are destined to continue to be cyclical.
So why did I weight the NCAV factor more than the industry economics factor?
Whenever you buy NCAV bargains you know that there are plenty of negative influences on the share – that is why it fell in the first place, as investors ran away.
But the question is whether investors have gone too far in disliking this company. If they have, then even if the odds of revival are less than 50:50 it will be a good buy (in a portfolio) if the estimated pay-off is very large.
When it comes to a NCAV company there is great fear that it will continue to lose money, and therefore the impressive balance sheet, particularly NCAV, will be eroded over time.
However, there are four possible paths of development that might reverse the destruction of value through the gradual dissipation of assets:
First: Earning power can lifted through an improvement in the economic background.
This might be the result of a general economic recovery. Titon plc had the potential to………… To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
