Broader weakness brings opportunity - Johnson Matthey has substance

Thursday, 30th May 2019 13:35 - by Shant

Amid the broader weakness in the stock markets, brought on not only by the trade tensions between the US and China but with Brexit uncertainty adding to the bearish UK outlook, investors get the opportunity to sift through the sea of red and look for underlying strength in growth and outlook.  Johnson Matthey seems to have weathered the storm better than the rest and it is not hard to see why.   The technology firm focuses its advancements in the automotive, pharmaceutical and energy markets, all of which are staples supported by baseline demand irrespective of the global economic backdrop.  

In the latest report, Johnson Matthey reported an operating profit of £566mln, representing an increase of 8% based predominantly on the performance of its Clean Air Division.  JM Plc is a leading producer of emission control catalysts for petrol, diesel and hybrid vehicles and sales growth outpaced global vehicle production levels, highlighting its market dominance.  At this point, it is worth noting that market share in European light-duty diesels rose to 65% - up 20% from a year ago - so there may be some negative forces emanating from the dreaded Brexit impasse, should we head towards an exit without a deal in place.  

Looking ahead, the company is also making inroads into the electric cars and has invested in a lithium nickel battery product eLNO, looking to capture growth in the demand for environment-friendly vehicles.  Intuitively, this goes against their input to the fuel based motor industry, though spreading obsolescence/technology risk is a practical move in the current climate and should pay dividends over the longer term.  

Revenues in natural resources and medical rose by 4% and 3% respectively, resulting in a combined operating profit of just under £225mln.  Johnson Matthey is a little more cautious over the 2019/20 period, but still expects to achieve growth of somewhere between 5-10%.  

Looking at the price drop today, we have seen a £1.50 fall from £32.0 based on the final dividend announcement this morning of 85.5p, which is up 7% on the previous year - 62.25p to be paid in the June tranche.  Based on the daily charts, we can see 'value' levels closer to £26.00-28.00, so would allow for further near term weakness in the interim, though JM Plc offers stable returns based on this year's performance and forward strategic positioning.  In long/short equity portfolios, the company offers good prospects for outperformance hedged against the broader indices and or, say customer discretionary.  

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.