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Johnson Matthey counts the cost of change

Investment Ideas 

Johnson Matthey counts the cost of change

BUY

Tip Update: Buy at 3,214p

Tip style
VALUE
Risk rating
MEDIUM
Timescale
LONG TERM
Our previous tip
We said BUY at 2779p on 31 Aug 2017
Tip performance to date
+16%

Shares in Johnson Matthey (JMAT) pulled back slightly after the self-styled “leader in sustainable technologies” revealed 5 per cent sales growth at constant currencies and reported that profits had been clipped by restructuring and impairment charges of £18.5m. Comparatives also suffered due to a £16m one-off gain at the 2016 half-year relating to changes in US post-employment benefits.

The restructuring charge relates primarily to redundancies and business closures, but the rationalisation of the business won’t come cheap. The full-year charge is estimated to be between £50m and £65m, over half of which will be cash, although that outlay should contribute towards a £25m reduction in annual expenditure – harsh medicine.

In September, the group alerted the market about a working capital outflow due to higher metal prices and lower liquidity, and this has been subsequently confirmed at £156m. Consequently, free cash flow was negative at £90.4m.

Excluding precious metals sales, revenues in the clear air segment were 7 per cent up on the 2016 comparative, driven by double-digit growth of heavy-duty diesel catalysts in every region, suggesting this market is still primed for growth post-'dieselgate'. Nonetheless, Johnson Matthey is forging ahead with the development of its high-energy battery material, enhanced lithium nickel oxide.

JPMorgan Cazenove expects adjusted profit of £494m for the March 2018 year-end, giving EPS of 212p, up from £482m and 209p in FY2017.

JOHNSON MATTHEY (JMAT)  
ORD PRICE:3,214pMARKET VALUE:£6.22bn
TOUCH:3,210p-3,215p12-MONTH HIGH:3,511pLOW: 2,681p
DIVIDEND YIELD:2.4%PE RATIO:16
NET ASSET VALUE:1,165p*NET DEBT:40%
Half-year toTurnover   Pre-taxEarnings perDividend
30 Sep (£bn) profit (£m)share (p) per share (p)
20165.6221092.720.00
20176.4820587.921.75
% change+15-3-5+9
Ex-div:30 Nov   
Payment:6 Feb   
*Includes intangible assets of £886m, or 458p a share

IC View

The shares are up 16 per cent on our August buy call, but with the shares at a wider price/earnings (PE) discount to peers on an historic basis, we think there’s still value on offer. Buy.  

Last IC View: Buy, 2,779p, 31 Aug 2017

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