Johnson Matthey Plc

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

The Company will announce H1 FY2021 results on 19 November 2020.

Investment Highlights - Johnson Matthey Plc – Buy at GBX 2,120.00

• Although the sales for the first quarter has declined in Q1 FY2021, the Company witnessed improvement in demand for clean air, while sales for other divisions remained flat.
• In the last six months, the Company delivered a decent return of ~ 8.21% and delivered higher returns compared to the benchmark Index (FTSE-100 Index).
• As per valuation metrics, EV/Sales and Price/Book Value multiples of the Johnson Matthey Plc are currently lower as compared to the corresponding multiples of the Chemicals industry. It reflects, shares are undervalued as compared to the industry.
• From the technical standpoint, 14-day RSI is in oversold zone and supporting an upside move (around 20 level), which means the stock price could increase in the short term.

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 the financial year 2020.

Trading Update for Q1 FY2021 (released on 23 July 2020)

• In the first quarter of FY2021, the sales from all divisions (except Clean Air division) were broadly flat as compared with the previous year.
• In Clean Air, the Company witnessed an improvement in demand for April, May and June 2020, driven by 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/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company witnessed an improvement in the trend for Clean air, while sales for Q1 were impacted. JMAT continue to make an investment in strategic growth projects and expects to drive attractive returns. The Company expects capital expenditure to be around £400 million for FY2021. The Company expects the total annualised cost savings to be delivered approximately £225 million by the end of FY2023. 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 price of GBX 2,120.00 (as on 30 October 2020, before the market close at 8:00 AM GMT), with lower double-digit upside potential based on 16.58x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

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

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

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