Johnson Matthey Plc - Strongly positioned to deliver significant future growth in hydrogen.

Johnson Matthey PLC (LON: JMAT) is a British multinational Speciality Chemicals Company. The Company bifurcates the operations into four segments, namely Health, Clean Air, New Markets, and Efficient Natural Resources.

On 19 November 2020, the Company will announce the results for the six months ending 30 September 2020.

Rationale for Valuation – Buy at GBX 2,397.00

• The Company has decent fundamental metrics as it has maintained a Net margin above 8% for the last three years.
• In the last six months, the Company has delivered a sparkling return of ~28.54%, which is higher as compared to the FTSE 100 Index.
• JMAT maintained a strong balance sheet and liquidity position as well as taking the next step towards larger use of electric vehicles.
• From the technical standpoint, shares were trading well above the short-term support level of 100-day (GBX 2,290.20) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• COVID-19 has reduced customer demand and increased volatility while simultaneously impacting the entire supply chain.
• Weaker activity in Clean Air segment can impact the second half of FY20.
• The emergence of the Covid-19 pandemic has significantly impacted global markets and presented major challenges for the chemical industry.

Recent News

On 8 September 2020, the Company announced that it had signed a global strategic alliance agreement with KBR (Houston, USA), which provides to license a ground-breaking ammonia-methanol coproduction process.

Q1 FY21 Trading Update (as on 23 July 2020)

• In Q1 FY21, the sales from the other sectors (except Clean Air division) were broadly flat as compared with the previous year.
• In Clean Air, the Company witnessed an improvement, with April 2020, May 2020 and June 2020 sales. The improvement was a result of a strong recovery in automotive production in China and a steady ramp-up in demand in the US and Europe.
• As expected, the Company’s sales were down materially at constant currency, driven by the effects of the COVID-19 pandemic.
• The Company maintained a strong balance sheet and good liquidity position.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

Platinum group metals (PGMS) is expected to be broadly flat in the first half of FY21, with the benefit from higher average precious metal prices. For the full year, it expects that the capex will be up to £400 million. The Company has a strong balance sheet and liquidity position to withstand the challenging market conditions. Looking forward, the Company expects the total annualised cost savings to be delivered approximately £225 million by the end of FY23. Moreover, the Company has been a leader in hydrogen activities for several years and witnessing an attractive growth opportunity in Fuel Cells. The stock made a 52-week low and high of GBX 1,614.00 and GBX 3,294.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Johnson Matthey at the current market price of GBX 2,397.00 (as on 8 October 2020, before the market close at 10:16 AM GMT+1), with lower double-digit upside potential based on 10.30x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

Victrex Plc – Operating with a robust financial position

Victrex Plc (LON: VCT) is a Speciality Chemical Company with operation interest lies in manufacturing and sale of various polymers. Its operating segments are categorised in Industrial (Victrex Polymer Solutions) and Medical (Invibio Biomaterial Solutions).

On 9 December 2020, the Company will announce the preliminary results for the financial year 2020.

Rationale for Valuation – Buy at GBX 1,941.00

• The Company has decent fundamental metrics as it has maintained a Net margin and ROE above the industry median in the past three years. In H1 FY20, the net margin was 27.3%, and ROE was 8.8%.
• On the liquidity front, the current ratio was 4.40x in H1 FY20, which was higher than the industry median. It has also maintained a current ratio above 2.00x for the last five years.
• The debt/equity ratio recorded by the Company in the past three years was considerably below the industry median. In H1 FY20, the debt/equity ratio was 0.02x.
• In the last three months, the Company has delivered a positive return of ~7.52%, which is higher as compared to the FTSE 250 Index.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (1,924.15) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The environment in which the Company operates is subject to several legislative and regulatory requirements. A failure to comply could adversely impact the local environment and manufacturing capability.
• The impact of COVID-19 has reduced customer demand and increased volatility while simultaneously impacting the entire supply chain.
• Fluctuations in exchange rates could impact the profitability and balance sheet position.

Full Year Trading Update (as on 6 October 2020)

• The Company’s sales volume decreased by 7% year-on-year to 3,492 tonnes, with a decrease in revenue of 10% year-on-year.
• However, in FY20, the top-line performance was slightly ahead of consensus expectations.
• The Company had shown a decent financial position and cost management, with net cash position on 30 September 2020 of £67.4 million and undrawn and committed RCF (Revolving Credit Facility) of £20 million.
• For the UK debottlenecking and China manufacturing subsidiary, the capital requirements are likely to be more than £50 million (including ongoing maintenance capital expenditure) in FY 2021.
• During the fourth and final quarter, the Company has shown a softer growth in Value Added Resellers, with an improvement in some end markets.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

At the start of FY21, the trading remains subdued, with some limited incremental improvement in Automotive and Medical monthly run rates. Due to lower production, the Company might see the continuing effects on the margin in FY21. Aerospace and Energy volumes have remained in line with the previous quarter (Q3 FY20). Also, it witnessed an improvement in some end markets. Overall, the Company has bright prospects with sustainable products, robust financial position and good liquidity position. The stock made a 52-week low and high of GBX 1,645.00 and GBX 2,574.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Victrex at the current market price of GBX 1,941.00 (as on 8 October 2020, before the market close at 8:04 AM GMT+1), with lower double-digit upside potential based on 24.50x Price/NTM Cash Flow (approx.) on FY20E cash flow per share (approx.). 

 

*All forecasted figures and Peer/Industry information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement

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