Johnson Matthey PLC

Johnson Matthey PLC (JMAT) is a British multinational speciality chemicals company. The company offers fuel cell technologies, battery materials for automotive applications, and battery systems for a range of applications. The group’s operations have been organised into four segments: Clean Air, Efficient Natural Resources, Health and New Markets.

On 21^st November 2019, the company will announce the interim results of the financial year 2020.

Recent News
On 17^th July 2019, the company announced that John Walker as Sector Chief Executive and Executive Director, Clean Air will retire from the group and step down from the Board on March 31, 2020.

Trading Update (as on 17^th July 2019)
The company said first-quarter sales had been flat and left guidance unchanged but cautioned that its Clean Air division would disappoint because of short-term costs tied to a Polish factory and logistics supporting sales growth in Europe. The full-year operating profit growth would be skewed towards the second half of the year. In London, the company will hold a Capital Markets Day on 19th September 2019.

Financial Highlights (FY2019, £million)

(Source: Annual Report, Company Website)

The company reported revenue of £10,745 millionfor the fiscal year ended March 2019, an increase of 5 per cent against the £10,274 million in FY2018. Operating profit for the year under review stood at £531 million against the operating profit of £359 million in FY18 and recorded a surge of 48 per cent. However, on an underlying basis, sales (excluding precious metals) grew by 10 per cent in FY19 to £4,214 million from £3,846 million in FY18.

Reported pre-tax profit increased to £488 millionagainst £320 million reported a year-ago period. Reported earnings per share surged by 38.7 per cent to 215.2 pence per share. However, on an underlying basis, earnings per share reported a growth of 10 per cent to 228.8 pence per share in FY2019.

In FY19, the group’s free cash flow was an outflow of £13 million, primarily because of platinum group metal refinery downtime, which has increased precious metal working capital and higher capex. During the year under assessment, return on invested capital (excluding net pension fund assets) declined to 16.4 per cent from 17 per cent recorded in the FY18, primarily because of increased precious metal working capital. The board of the company recommended an ordinary dividend per share of 85.5 pence against 80.0 pence recorded in FY18.

Valuation Methodology
 

Share Price Performance

Daily Chart as at September-09-19, before the market closed (Source: Thomson Reuters)

On 9th September 2019, Johnson Matthey PLC shares were trading at GBX 3,085 at the time of writing before the market close (at 8:20 AM GMT), down by 0.48 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 3,692/GBX 2,574. The company’s stock beta was 1.53, reflecting the higher movement of the stock as compared to the benchmark index.

Conclusion
The company has a strong portfolio of products and technologies. In the environmental industry, the group's products and technologies are used to control emissions from vehicles and factories, remove unwanted impurities in oil refining processes and produce chemicals from sustainable feedstocks. Such contracts will increase the reach and expertise of the company, thus helping it to increase its revenue in the future.

The company anticipates a year of more modest growth in the financial year 2020, weighted to the H1 FY2020 as they realise the benefit of annualised share gains, partially offset by reinvestment into Research & Development (R&D), the ERP (enterprise resource planning) system and new manufacturing capacity. The company expect that these investments for progress and effectiveness will lead to a slightly low margin against the financial year 2019. Beyond FY2020, the company anticipates operating profit and sales growth to be increased due to the introduction of new legislation in India and China.
For the medium-term guidance, the company anticipates progress in operating performance at constant rates basis and will be at mid to high single-digit growth. In terms of phasing, the company anticipates performance to be more heavily weighted during the second half.

At current foreign exchange rates translational foreign exchange movements for the financial year 2020 are anticipated tobenefit underlying operating profit by £12 million and sales by £75 million.
Based on the above factors and supported by valuation done using the above method, we have given a “Hold” recommendation at the closing price of GBX 3,100 (as on 6th September 2019), based on 13.5x NTM P/E multiple (approx.) on FY20E earnings per share (approx.).
 

Berkeley Group Holdings PLC

Berkeley Group Holdings PLC (BKG) is a Surrey, United Kingdom-headquartered holding company which is engaged in the development of the residential and used property across London, Birmingham and the South of England.  The group is a constituent of the FTSE 100 index.

Trading Statement (as on 6^th September 2019)
In London and the South East, market conditions in the first four months of this new financial year have remained healthy and consistent. Pricing has remained constant and the company's forward sales performance remains over £1.8 billion.

There was decent underlying demand for new homes built to a high quality that are well-positioned and appropriately priced to meet the local housing need, maintained by decent availability of mortgages.  The broader market remains constrained by high transaction costs and the uncertainty in the macro-economic and political environment.

Financial Highlights (FY2019, £million)

(Source: Annual Report, Company Website)

In FY19, new homes of 3,698 were sold at an average selling price of £748,000, revenue surged to £2,957.4 million, representing a surge of 4.1 per cent. Profit before tax declined by 20.7 per cent to £775.2 million,corresponding to pre-tax return on equity of 27.9 per cent, against the 41.9 per cent in FY18. Basic earnings per share declined by 18.1 per cent to 481.1 pence in FY19, and shareholder returns stood at £251.9 million.At the end of the year 2019, net cash stood at £975.0 million.

Share Price Performance
 
(Source: Thomson Reuters): Daily Chart as at September-09-19, before the market closed
 
On 9th September 2019, BKG shares were quoting at GBX 4,022 at the time of writing before the market close (at 11:00 AM GMT) and increased by 1.05 per cent against the previous day closing price.  Stock's 52 weeks High and Low are GBX 4,085/GBX 3,170. The company’s stock beta was 0.56, reflecting the lower movement of the stock as compared to the benchmark index.

Conclusion
As per the latest data revealed by MHCLG (Ministry of Housing, Communities and Local Government), in 2018, homes demand in London was approximately 30% below the 2015 peak and substantially below the London’s planned target of 66,000 homes per year. Also, the completion of homes slumped substantially by 32% in 2018 against the year-ago period. The operating environment for the industry looks challenging for the coming three years, as the UK's decision to crash out of the EU bloc has brought a lack of visibility in political outlook. Both demand and supply of homes are at best stagnant at present, and the political uncertainty looks likely to persist for the short-term.

During the period, it was reported that gross margins and pre-tax return on equity declined and this trend might prevail at the company for a mid-term time horizon, mainly because of reluctant demand and supply in its operating segments. A reduction in demand due to changes in economic conditions in the UK, Europe and worldwide would hit the group hard as the business is sensitive to a wider economic factor. Relative to the industry, the group looks highly overpriced.

On the basis of above rationale, we recommend investors to keep a “Watch” on the stock at the current price of GBX 4,022 (as on 9th September 2019), while we look for any upcoming catalysts.
 
*All forecasted figures and peers have been taken from Thomson Reuters.

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