Overview

Johnson Matthey PLC (JMAT) is a British multinational speciality chemicals company. From a single office in London in 1817, in which Percival Norton Johnson set up his gold assaying business, the company has expanded its global presence considerably, operating in more than thirty countries. In 1852, the company was appointed as the official assayers and refiners to the Bank of England; subsequently, the company became a limited company in 1891 and was listed on the London Stock Exchange in 1942. Today, the company is a global leader in sustainable technologies, with 43 major manufacturing sites worldwide. In 2018, the company employed 14,000 colleagues worldwide. The company is headquartered in London, United Kingdom and is a constituent of the FTSE 100 Index. 

Management
The Board is Chaired by Patrick Thomas, who was appointed to the Board in June 2018. He is also the Chairman of the Nomination Committee. The current Chief Executive Officer is Robert MacLeod. He was appointed to the Board in June 2019 in the capacity of Group Finance Director and was appointed as the Chief Executive in June 2014. The responsibilities of the Chief Financial Officer are held by Anna Manz, who was appointed to the Board in October 2016.
 

Product and Geographical Segments

The group’s operations have been organised into four segments: Clean Air, Efficient Natural Resources, Health and New Markets. The clean air segment helps to effectively and efficiently reduce emissions from vehicles and other sources; Efficient Natural Resources sector helps customers to achieve greater efficiency and optimal yields in the use of natural resources; Health sector creates complex solutions to improve the efficiency of products and speed up the route to market, getting more effective treatments to the consumer faster; and New Markets sector exists to meet the demand for innovation, nurturing the potential future growth areas of the business to find new focuses for innovation and success. The company’s business is differentiated in four geographical segments: Europe, North America, Asia and Rest of World. Europe is the largest geographic segment for the company.

Key Statistics

Key Financial Metrics (H1 FY2019, in £m)

(Source: Company Filings)

Key Financial Highlights ( H1 FY2019, in £m) 

In H1 FY19, the underlying sales excluding precious metals surged by 10 per cent to £2,009 million as compared to £1,853 million reported last year in H1 FY18. The reported revenue increased to £7,108 million from £6,478 million, an increase of 10 per cent. The growth was driven by continued strong growth in Clean Air which grew by 11 per cent, assisted by growth in both light and heavy duty. The underlying operating profit increased by 10 per cent and reported operating profit increased to £264 million, up by 19 per cent, due to £18 million impairment and restructuring charge recorded in the previous year. Reported EPS rose by 21 per cent, reflecting higher operating profit and a lower tax rate due to change in the US tax legislation, underlying EPS was up 9 per cent and grew slightly ahead of operating profit. The cash outflow from operating activities was £88 million, driven by a rise in working capital for precious metal which increased because of platinum group metal refinery downtime. This also led to an impact on free cash flow, which reported an outflow of £206 million. Interim dividend increased by 7 per cent to 23.25 pence. Return on invested capital decreased from 16.4 per cent at the end of FY 2018 to 16.0 per cent in 1H FY2019, mainly due to an increase in the net pension fund asset. However, a strong balance sheet was maintained with net debt to EBITDA of 1.5 times. The capital expenditure was £104 million in the first half. Efficient Natural Resources' revenue increased by 3 per cent and it reported a healthy operating profit growth; in Health, sales remained stable, but operating profit was lower; and New Markets saw strong sales growth but lower operating profit.

Financial Ratios

(Source: Thomson Reuters)

Ratios Commentary

The company's profitability margins were considerably lower than the industry median, reflecting very high costs and poor use of resources. In the first half of FY 2019, though the profitability ratios increased, the margins were still considerably lower than the industry. The liquidity ratios of the company are more depressed than its peers. Moreover, the current ratio increased in the first half of FY 2019, while the quick ratio declined, indicating a lower proportion of cash available with the company. The assets/equity is lower than the industry median and fell further in H1 2019, showing equity covered a higher portion of assets. Also, the company's leverage position is more or less in line with the industry's standard. A higher asset turnover ratio indicates a better and more optimal use of company's assets, which is further supported by a higher fixed asset turnover ratio.

Valuation Methodology

Method 1: Price/Earnings Multiple Approach (NTM) (EPS (FY19E) approximately)

Method 2: Price/Cash Flow Multiple Approach (NTM)  

To compare Johnson Matthey with its peers, Price/Cash flow value multiple has been used. The peers are Umicore SA (NTM P/CF was 19.33), Victrex PLC (NTM P/CF was 16.12), Akzo Nobel NV (NTM P/CF was 15.59), Koninklijke DSM NV (NTM P/CF was 12.48), BASF SE (NTM P/CF was 7.5) and Covestro AG (NTM P/CF was 5.15). The median of Price/Cash flow (NTM) of the company’s peers was 14.04x.
 

* All forecasted figures and peers have been taken from Thomson Reuters.
 

Share Price Commentary

Daily Chart as at Mar-08-19, before the market close (Source: Thomson Reuters)

On 8th March 2019, at the time of writing (before market close), JMAT shares were trading at GBX 3,063, down by 1.63 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 3,873.00/GBX 2,574.00. At the time of writing, the share was trading 20.86 per cent lower than its 52w High and 19.07 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 340,455.80; 30 days - 436,541.70 and 90 days - 517,972.82. The average traded volume for 5 days was down by 22.01 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 13.9x as compared to the industry median of 12.3x. The company’s stock beta was 1.51, reflecting high volatility as compared to the benchmark index. The outstanding market capitalisation was around £6.07 billion and a dividend yield of 2.62 per cent.

Risks Assessment and Growth Prospects

For the year ending 31st March 2019, the company expects growth in operating income at constant rates to be in the upper end of previous guidance of mid to high single-digit growth; at the current exchange rates, favourable currency movements are expected to increase sales and underlying operating profit by £1 million and £2 million respectively. The slowing world economic growth, especially in China, can significantly affect the demand for its product. Moreover, although the company is not directly affected by Brexit, changes in trade and regulation can hamper the business. Since the company has a trading relationship across Europe, the company can face disruption in its supply chain. The company is taking steps like building inventory to minimise the impact. The company is expected to be favourably impacted by the increasingly tighter emissions regulations, especially sales in Clean air is expected to rise. However, being a manufacturing company, the company is subject to numerous health, safety and environmental laws, regulations and standards, and any adverse shift can significantly impact the company's operations. The company has limited suppliers from which it sources its strategic raw materials and any breakdown in the supply, especially considering the risk from Brexit, would result in the company's inability to manufacture and satisfy customer demand.

 
Conclusion

The company’s growth is expected to be driven by continued strong growth in Clean Air followed by the company’s diesel share gains and growth in heavy duty. In health, the company has made good strategic progress and will further help the company to report strong financials in future. Based on healthy fundamentals supported by favorable market conditions and the valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 3,114 (as on 7th March 2019) with double-digit upside potential based on 15.4x NTM Price/Earnings on FY19E earnings per share and 14.04x NTM Price/Cash Flow on FY19E Cash flow per share.

*The buy recommendation is valid for the current price as covered by the report as on (8th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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