Far-sighted investors are assessing how they can position themselves to capitalise on any opening-up of the North Korean economy. I’ve stumbled across this Main Market listed company that appears to be the closest thing to a UK-listed play on this opportunity…
Donald Trump is scheduled to meet Kim Jong Un in a historic summit in Singapore on 12 June, which many commentators are hoping will lead to a détente and eventual denuclearisation in the peninsular. If that should happen – and admittedly that is a big if– then a marketisation of the North Korean economy may follow.
Meet Titon Holdings (LON:TON). Titon describes itself as “The home of domestic ventilation systems and door and window hardware”. That might not seem all that enticing, but it does 32% of its business in South Korea and is exactly the kind of entity that would be enlisted to help ‘rebuild’ North Korea, should the opportunity arise.
When Rocketman met The Donald
It was only last November that North Korea launched an ICBM into the Sea of Japan and set the international community’s pulse racing. Since then, we’ve been treated to a whiplash series of events which has culminated in a historic meeting between the respective leaders of North and South Korea. In turn, this has set the scene for what promises to be an extraordinary summit between Kim and Trump in June – if it ultimately goes ahead that is.
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Of course, what we are dealing with here is a meeting of two of the biggest egos on the planet, so the jury is well and truly out on what the outcome from such a gathering might be. However, should it prove a success, there is hope that it could lead to lasting peace in the Korean peninsula – which, let’s not forget, has technically been in a state of war ever since the 1950s. Encouragingly, since the meeting of North and South, North Korea has scheduled the dismantling of its nuclear test site, Punggye-ri, for between 23 and 25 May.
The Miracle on the Taedong River?
In what became known as The Miracle on the Han River, South Korea propelled itself from one of the world’s poorest countries to one of its richest in a little over a generation. Assuming North Korea adopts a market-based economy and opens up its markets to foreign investment, I see no reason to assume that something similar can’t be achieved in the North – The Miracle on the Taedong River, perhaps?
A key factor in such a transformation would be rapid urbanisation, with just 61% of the North Korean population currently living in urban areas, as opposed to around 83% in the South. This would require significant fixed capital investment, which would play into the hands of purveyors of hardware products such as Titon.
During the first half of its fiscal year, Titon generated 74% of its net profit in South Korea, where it is already the market leader in natural ventilation products. Overall, the group posted a 16% rise in pre-tax profit and a 4% increase in turnover for the six months. There was also a 17% hike in the interim dividend, which suggests management have a very positive assessment of future prospects. I’m also encouraged by the fact that management, founders and their families collectively own 39.3% of the equity.
As for the valuation, the shares trade on just 11.7x house broker Hardman’s 2018 earnings per share estimate. On the balance sheet, there is also a net cash pile of over £3 million to sweeten the bargain. Although this isn’t one to go ploughing into guns blazing, I think Titon Holdings offers decent ‘option value’ on the potential for North Korea’s possible re-entry into the global community.