Johnson Matthey PLC

Johnson Matthey PLC (LON: JMAT) is a FTSE 100 listed multinational Speciality Chemicals Company. The Group bifurcates its operations into four segments: Health, Clean Air, New Markets, and Efficient Natural Resources.

On 24 November 2021, JMAT expects to release its H1 FY22 results.

Investment Rationale – BUY at GBX 2,273.00

• Focusing on Core Competency: JMAT has decided to exit Battery Materials business and will be focus on other attractive growth areas aligned with its leadership position across chemicals value chain.
• Solid Momentum: JMAT started FY22 well with good momentum and increased demand. The Company is also likely to get benefit from improved end-market conditions and higher precious metal prices.
• Promising Prospects: In the long-term, Clear Air division shall witness sustainable demand, while the Company has strong pipeline of projects under Efficient Natural Resources division.
• Technical Indicator: From a technical standpoint, 14-day RSI (~25.76) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.
• Undervalued Multiples: On a forward 12-month basis – EV/EBITDA, Price/Earnings, Price/Cash Flow, Price/Earnings, and Price/Book valuation multiples are undervalued against the median of the Chemicals sector.

Risk Assessments

• Supply Chain Snags: The shortage of semiconductor chips can impact production volumes in Automotive and truck OEMs division.
• Macroeconomic Instabilities: The concerns regarding sterling dips, volatile precious metal prices, and resurgence in Covid-19 cases can keep the market unstable in the short-term.

Recent News

CEO Announcement: On 11 November 2021, JMAT announced that Robert MacLeod has shared his intentions to step down as CEO. Liam Condon will succeed his position from 1 March 2022.

Trading update (as on 11 November 2021)

• Commercialisation: JMAT progressing to commercialise its range of high nickel cathode material, particularly targeting the automotive industry.
• Business Exit: It will not proceed with Battery Materials business due to unfavourable business viability.
• Growth Areas: It is also exploring opportunities in other growth areas, such as hydrogen technologies, decarbonisation of the chemicals value chain, and circularity.

Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

Conclusion 

JMAT experienced solid sales growth in Q1 FY22, driven by higher demand in Clean Air and Efficient Natural Resources. The trading for FY22 is likely to be at the lower end of market expectations. The Group has also expanded its manufacturing facilities in the UK and appeared optimistic about the future. The stock made a 52-week High and Low of GBX 3,363.00 and GBX 2,195.00, respectively.

Based on the increase demand, improved economic outlook, diversified business portfolio, and favourable valuation conducted above, we have given a “BUY” recommendation on Johnson Matthey PLC at the closing price of GBX 2,273.00 (as on 12 November 2021), with lower double-digit upside potential based on 12.38x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.). 

*All forecasted figures and Peer Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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