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.

Key Dates: The interim dividend will be paid on 1 February 2022 to shareholders on the register on 3 December 2021.

Investment Rationale – BUY at GBX 1,999.50

• Earnings Per Share: The underlying EPS grew significantly in H1 FY22 on the back of strong underlying operating profit and lower net finance costs.
• Simpler Portfolio: The disposal of Advanced Glass Technologies business is another step towards focusing its resources towards growth areas targeted at climate change solutions.
• Long-term Horizon: The 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 (~19.58) 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/Sales, Price/Earnings, Price/Cash Flow, Price/Earnings, and Price/Book valuation multiples are undervalued against the median of the Chemicals sector.

Risk Assessments

• Macroeconomic uncertainty: Surging inflation has curbed growth in the UK service sector, and consequently, the UK Services Purchasing Managers' Index fell from 59.1 in October 2021 to 58.5 in November 2021.
• Weak UK GDP: The UK economy witnessed a slowdown as the GDP grew quarter-on-quarter by around 1.3% during Q3 FY21, which remained merely lower-than-expected growth of around 1.50%.
• Supply Chain Snags: The shortage of semiconductor chips can impact production volumes in Automotive and truck OEMs division.

Recent News

Disposal: On 24 November 2021, JMAT announced the sale of its Advanced Glass Technologies business for £178 million on a cash free debt free basis, to Fenzi Holdings SPV S.p.A. The transaction is expected to be completed by spring 2022.

Interim Results (or the six months ended 30 September 2021, as on 24 November 2021)

(Source: Company Website)

• Financial Growth: During H1 FY22, sales and underlying operating profit surged by 21% and 102% year-on-year, respectively.
• Strong Fundamentals: Driven by higher underlying operating profit in H1 FY22, return on invested capital increased to 17.7% from 10.4% in H1 FY21.
• Health Balance Sheet: As lower auto demand benefited working capital, net debt stood around £700 million at the end of H1 FY22. The net debt to EBITDA stood at 0.9 times.

Share Price Chart

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

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

Conclusion

JMAT has witnessed good momentum and increased demand. Moreover, it is also likely to get benefit from improved end-market conditions and higher precious metal prices. Also, there was a 10% jump in interim dividend, reflecting the confidence in the outlook. Meanwhile, the Company is also planning to begin share buyback in the New Year.

It has also decided to exit Battery Materials and will be focus on other attractive growth areas aligned with its leadership position across chemicals value chain. The stock made a 52-week High and Low of GBX 3,363.00 and GBX 1,959.46, 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 1,999.50 (as on 13 December 2021), with lower double-digit upside potential based on 10.56x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.). 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*All forecasted figures and Industry 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.

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