Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

TITAN EUROPE - management needs to focus on the current operation and forget about further acquisitions for the time being

Titan Europe has announced that having reviewed the September and October trading figures, being apparently the key months in the second half of the year, they are concerned about the trading mix. Surely they had concerns at the time of the interims announced on 21st September when everything was apparently rosy and a stronger performance anticipated in the second half of the year.

The second half will show broadly similar performance to the first half which is highly disappointing given the markets in which Titan operates.

The undercarriages part of the business acquired through he Italtractor deal appears to be the cause of the problem – another merger that’s failed to live up to expectations, at least in the short term!

The group is of the view that it is ‘precautionary short term de-stocking rather than a sea change in demand for undercarriages’ - I hope so!

The agricultural order book is apparently also very strong, wonderful news you might be lead to assume, however, this has created ‘short term, but significant margin erosion due to pressure on operational efficiencies’.

As I have emphasised on several occasions before management needs to get a grip of the current operation and desist from further deals.

The stated list of problems includes: increased change over time (what on earth is that!), overtime working, high priced supplementary material purchase and the purchase of product from lower margin sources including the Group's operations in Turkey and France as well third party suppliers. What a disaster!

The group’s view of 2008 remains positive with a flat material price (that could rear its ugly head again!) and the full impact of 2007 pricing increases helping margins. Order books apparently remain strong but so they should do given the state of the underlying resources and agricultural markets!

Perhaps iwe were looking for too much from Titan in the short term and they simply need to manage expectations better!

Today’s announcement results in a 20% downgrade to current year forecasts only six weeks after encouraging comments at the interims on 21st Sept 2007 and further encouraging comments in the pre-close update on 27th July.

The group is one of only two global players in large off road wheels and is a leader in undercarriages. With the mining and agriculture sectors booming it’s really hard to fathom why they aren’t experiencing more stellar times.

At least one broker is reducing their forecast of profit before tax by c22% for the year to December 2007 from £30m to £24.5m – that’s a big chunk! This equates to EPS for the current year of 18p. Forecast profit before tax for 2008 drops from £39m to £34m equating to EPS of 25.5p.

On the revised forecasts, the Group is rated at 9.1x 2007 earnings, falling to 6.6x for 2008. These numbers look ridiculously low given the markets in which they operate, however, this group has consistently failed to deliver over the last few years so many will be having doubts!

One broker has cut their 12 month price target from 300p to 225p – as I write the shares stand at 155p!


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