Johnson Matthey PLC

Johnson Matthey PLC (LON: JMAT) is an FTSE 250 listed multinational Speciality Chemicals Company.

The interim dividend was paid on 1 February 2022 to shareholders on the register on 3 December 2021.

Investment Rationale – BUY at GBX 1,877.00

• Disposal Completion: On 1 February 2022, JMAT announced that the sale of Advanced Glass Technologies business was completed, for £178 million on a cash-free, and debt-free basis.
• 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.
• Dividends: There was a 10% jump in the interim dividend, reflecting the confidence in the outlook.
• Share Buyback Programme: On 21 December 2021, JMAT announced that it commenced the first tranche of the share buyback programme of up to £100 million.
• Technical Indicator: From a technical standpoint, the momentum oscillator, 14-day RSI (~38.74) indicates an oversold signal, while the stock price is trading around the lower Bollinger Band.
• Undervalued Multiples: On a forward 12-month basis – EV/EBITDA, EV/Sales, Price/Earnings, Price/Cash Flow, Price/Earnings, and Price/Book valuation multiples are undervalued against the median of the Basic Materials sector.

Risk Assessments

• Weak Investor Sentiments: In order to curb the surging inflation, the Bank of England might raise interest rates
• Supply Chain Snags: The shortage of semiconductor chips can impact production volumes in the Automotive and truck OEMs division.

Interim Results (or the six months ended 30 September 2021, as of 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.
• Profitability: The underlying EPS grew significantly in H1 FY22 on the back of strong underlying operating profit and lower net finance costs.
• 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 disposal of Advanced Glass Technologies business for £178 million and Health business for a total consideration of £325 million, shall strengthen the capital allocation policy. Adjacently, the Clear Air division shall witness sustainable demand, while the Company has a strong pipeline of projects under the Efficient Natural Resources division. The stock made a 52-week High and Low of GBX 3,363.00 and GBX 1,838.00, respectively. 

Based on the increased 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 1,877.00 (as on 3 February 2022, at 8:05 AM GMT), with lower double-digit upside potential based on 10.53x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.). 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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