Johnson Matthey PLC

Johnson Matthey PLC (LON: JMAT) is a FTSE 250 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 1,952.50

• Financial Growth: During H1 FY22, sales and underlying operating profit surged by 21% and 102% year-on-year, respectively.
• Disposal Update: JMAT announced intentions to sell the business of battery materials, which reported the carrying value of £314 million as on 30 September 2021. Previously, the disposal of Health and Advanced Glass Technologies business were 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 (~36.27) 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 to a three-month low of 54.3 in December from 55.5 in November.
• Supply Chain Snags: The shortage of semiconductor chips can impact production volumes in Automotive and truck OEMs division.

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

(Source: Company Website)

• 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

The underlying EPS grew significantly in H1 FY22 on the back of strong underlying operating profit and lower net finance costs. Also, there was a 10% jump in interim dividend, reflecting the confidence in the outlook. Meanwhile, the Company also shared intentions to begin share buyback in the New Year. Going forward, it would 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 1,880.50, 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 current price of GBX 1,952.50 (as on 17 January 2022, at 8:05 AM GMT), with lower double-digit upside potential based on 10.60x 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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