Business Overview
Johnson Matthey Plc (LON: JMAT) is a multinational speciality chemicals company headquartered in London. 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. The company is a global leader in sustainable technologies, with 43 major manufacturing sites worldwide with an employee base of 14,800 professional operating in over 30 countries worldwide. The company’s product and services include diagnostics services, Metal brazing, Gasoline particulate filter, Process optimisation, Ceramic 3D printing, Metal additive manufacturing, Gauze catalysts, CATACEL SSR catalyst, Diesel oxidation catalyst, Diesel particulate filter, SCRF technology, API process development and manufacture and Environmental performance. The product and services offerings of the company are used by multiple industries which consist of Chemicals, Automotive, Oil and Gas, Pharmaceutical and medical, Food and beverage, Agrochemicals and fertilisers, Glass and Energy generation and storage. The company also has a team of 1,500 scientists conducting all activities related to research and development.

The Board is Chaired by Patrick Thomas, who was appointed to the Board in June 2018. The current Chief Executive Officer is Robert MacLeod. He was appointed to the Board in June 2009 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.

Key Statistics

 

Top Shareholders
 
 
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.

Financial Highlights – H1 Financial Year 2020 (30^th September 2019, GBP, million)


(Source: Interim Report, Company Website)
 
In the first half of the financial year 2020, due to higher prices of the precious metal for the period, the company’s revenue increased by 37 per cent to GBP 6,818 million as against GBP 4,967 million in H1 FY2019. The company’s sales (excluding precious metals) surged by 3 per cent on CER (constant exchange rate) basis and 6 per cent on AER (actual exchange rate) basis to GBP 2,124 million in H1 FY2020 versus GBP 2,009 million in H1 FY2019, driven by good performance in Efficient Natural Resources and Clean Air businesses. The company’s underlying operating profit declined by 5 per cent on CER basis from GBP 271 million in H1 FY2019 to GBP 265 million in H1 FY2020, the decline was due to GBP 15 million of one-off costs in Clean Air. The company’s reported operating profit declined by 2 per cent to GBP 259 million in H1 FY2020 from a reported operating profit of GBP 264 million in H1 FY2019. The company’s underlying PBT (Profit before tax) declined by 8 per cent on AER basis and 10 per cent on a CER basis to GBP 231 million in H1 FY2020 from an underlying PBT (Profit before tax) of GBP 251 million in the first half of the financial year 2019. The company’s reported PBT (Profit before tax) declined by 8 per cent to GBP 225 million in the first half of the financial year 2020 from a reported PBT (Profit before tax) of GBP 244 million in H1 FY2019. The PAT (Profit after tax) in H1 FY2020 stood at GBP 176 million versus a PAT (Profit after tax) of GBP 204 million in H1 FY2019. In the first half of the financial year 2020, the company’s basic earnings per share stood at 91.8 pence versus basic earnings per share of 106.1 pence in the first half of the financial year 2019. The diluted earnings per share stood at 91.6 pence in the first half of the financial year 2020 versus diluted earnings per share of 105.9 pence in H1 FY2019. The company’s interim dividend went up by 5 per cent from 23.25 pence in the first half of the financial year 2019 to an interim dividend of 24.50 pence in the first half of the financial year 2020. The company’s capital expenditure in the H1 FY2020 stood at GBP186 million and is estimated to be around GBP 500 million for the full year.

Key Performance Indicators


Sales excluding precious metals

Sales (excluding precious metals) is used by the company to measure the company’s growth. In the financial year 2019, driven by growth in New Markets and Clean Air businesses, the company’s sales increased by 10 per cent on constant currency basis to GBP 4,214 million from GBP 3,846 million in the financial year 2018.


Underlying earnings per share

Adjusted earnings per share is a primary measure used by the company to measure the overall profitability of the company. The company’s underlying earnings per share (EPS) increased by 10 per cent to 228.8 pence in FY2019 from 208.4 pence in FY2018, due to lower tax rates for the period.


Customer satisfaction

In 2018/2019 the company carried its first standardised survey for customer satisfaction with its customers representing sales in Efficient Natural Resources of approximately 80 per cent. The company achieved 8.3 which is above the industry norm of 7.6.


Carbon footprint per unit of production output

The company calculate its carbon footprint in tonnes of CO2 eq (carbon dioxide equivalent) including Scope 1 and Scope 2 emissions. In FY2019, the carbon footprint per unit of production output declined to 2.9 tonnes CO2 equivalent per tonnes versus 3.4 tonnes CO2 equivalent per tonnes in FY2018.

Financial Ratios
 
 

The reported gross margin in the first half of the Financial Year 2020 declined by 2.2 per cent to 7.3 per cent from 9.5 per cent reported last year for the same period. The reported EBITDA margin in the first half of the FY2020 decreased by 1.7 per cent to 5.3 per cent against 7.00 per cent reported last year for the same period. The reported operating margin in the first half of the Financial Year 2020 declined by 1.5 per cent to 3.8 per cent from 5.3 per cent reported last year for the same period. The reported Pre-tax margin in H1 FY2020 was down by 1.6 per cent to 3.3 per cent against 4.9 per cent reported last year for the same period. Net margin reported was 2.6 per cent for the first half of the financial year 2020, reflecting a decline of 1.5 per cent when comparedwith last year data for the same period. The company’s Net margin for the period was below industry Median of 7.9 per cent for the period. Return on equity for the first half of the Financial year 2020 stood at 6.6 per cent, which was higher than the industry median of 6.1 per cent. On the liquidity front, Johnson MattheyPlc’scurrent ratio in H1 FY2020 was lower than the industry median of 1.62, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Johnson MattheyPlc’swas 0.58x, which was slightly higher as compared to the industry median of 0.57x, reflecting that the company is more leveraged as compared to its peers.

Share Price Performance


Daily Chart as at January-06-20, before the market close (Source: Thomson Reuters)
 
On January 06, 2020, at the time of writing (before the market close, at 12:28 PM GMT), Johnson MattheyPlc shares were trading at GBX 2,924.00, down by 2.24 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 3,475.00/GBX 2,739.00. At the time of writing, the share was trading 15.86 per cent lower than the 52w High and 6.75 per cent higher than the 52w low. Stock’s average traded volume for 5 days was 310,739.40; 30 days – 605,089.67 and 90 days – 528,616.14. The average traded volume for 5 days was down by 48.65 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.50, reflecting high volatility as equated to the benchmark index. The outstanding market capitalisation was around £5.81 billion, with a dividend yield of 2.90 per cent.The shares of the company have delivered a positive return of 1.95 per cent in the last quarter. The company’s stock has given investors 4.21 per cent of a positive return in the last month.

Valuation Methodology
Method 1: Price to Earnings Multiple Approach (NTM)
 
 

To compare Johnson MattheyPlc withits peers, Price/Earnings multiple has been used. The peers are Elementis Plc(NTM Price/Earnings was 11.52), Scapa Group Plc(NTM Price/Earnings was 9.90), Synthomer Plc(NTM Price/Earnings was 9.22), Bayer AG(NTM Price/Earnings was 9.00) and Carclo Plc(NTM Price/Earnings was 2.43). The average of Price/Earnings (NTM) of the company’s peers was 8.40x (approx.)

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

 

To compare Johnson MattheyPlc with its peers, Price/Cash Flow multiple has been used. The peers are Croda International Plc(NTM Price/Cash Flow was 20.76), Victrex Plc(NTM Price/Cash Flow was 20.03), Linde Plc(NTM Price/Cash Flow was 14.23), Elementis Plc(NTM Price/Cash Flow was 9.78) and Synthomer Plc(NTM Price/Cash Flow was 9.68). The Average of Price/Cash Flow (NTM) of the company’s peers was 14.90x (approx.)

Growth and Risk Assessments

The company has been focussed on creating high-quality products and services, which had resulted in a higher level of customer satisfaction. The company through its dedicated research and development team is providing superior quality products and also bringing new products and technologies which is helping them to expand into new industries. 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. 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 has a strong portfolio of products and technologies. In the environmental industry, the group's products and technologies are used to control emissions from vehicles and factories, remove unwanted impurities in oil refining processes and produce chemicals from sustainable feedstocks. Such contracts will increase the reach and expertise of the company, thus helping it to increase its revenue in the future.

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.

Over the course of 5 years (FY14 - FY19), the company’s net income surged from GBP 340 million in FY14 to GBP 413 million in FY19. Compounded annual growth rate (CAGR) stood at 3.97 per cent.
Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 2,902.00 (as on 6^th January 2020, before the market close at 9:35 AM GMT) with low double-digit upside potential based on 8.40x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.) and 14.90x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 

*All forecasted figures and peer information have been taken from the Thomson Reuters.

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