Failure to applaud is the original meaning of the idiom ‘to sit on your hands’; it originated in the theatre, when an unimpressed audience refused to clap. In the modern lexicon, it means to remain idle when things go awry and when action is required. Titon has had a charmed run over the past three years but this year has met with a tough South Korean crowd. But “it is not in Titon’s nature to sit on its hands” and its decisive action will produce results in fiscal 2020 and 2021 and win the critical success Titon is used to.
On 15 May, Titon promulgated its half-year figures, which were impressive with EBITDA rising 29% to £1.35m, EBIT margins widening from 4.9% to 6.9% and underlying pre-tax profit surging 26% to £1.30m. However, the comparatives were flattered by the restatement of fiscal 2018 due to an accounting issue.
On 14 February, Titon issued an unscheduled trading statement in respect of its star-turn South Korean business. There had been a slowdown in the new residential market and a structural shift in product preference, which meant that the trading performance would be substantially lower than forecast at that time.
In South Korea, the group has been quick to act, lowering overheads and costs. At the same time, it has enacted plans to introduce new ventilation (mechanical and natural) to the market early in 2020. The South Korean economy, number 12 in the world, also continues to grow at 2.6% (2019) and 2.8% (2020) to the envy of its peers.
The UK, meanwhile, is something of a Steady Eddie with Brexitcompliant GDP growth of 1%-2%. Continental Europe and the US should move from loss to profit this year. Fiscal 2019, however, will be an unpopular year with group pre-tax profit sharply lower (due to the current issues in South Korea). Revised numbers for 2020 and 2021, though, show Titon returning to growth and into double digits in the latter year.
The Hardman UK Building Materials Sector comprises 23 companies with a market value of £8.57bn and a valuation of 9.2x EV/EBITDA on a trailing 12-month basis (priced on 15 May) or 12.3x weighted by market capitalisation. Titon is on just 6.0x (albeit rising to 6.8x prospective). At the same time, the Sector’s Total Shareholder Return (TSR) is 2.9% actual or 8.3% weighted. Titon is at -18.9% having been at +17.7% in calendar 2018. Investors will stand up and clap again.