Johnson Matthey: A 200-Year Old Refiner

07/11/2018 5:00 am EST


Vivian Lewis

Editor and Publisher, Global Investing

Johnson Matthey (JMPLY), the 200-yr old U.K. refiner of gold and platinum metal catalysts which are used to clean up emissions, is a new buy. It is diversifying into cobalt refining to reduce nasty vehicle and process emissions, explains Vivian Lewis, international investing expert and editor of Global Investing.

We used to own this stock in the past and want to add some chemistry to our mixture. It is a near dividend aristocrat (it missed in 2013-15). It is expanding into healthcare, making active pharmaceutical ingredients, mostly small molecules and life sciences catalysts.

This is a fast growing business and has the highest margins in the Johnson Matthey group, at 18%, supplying both pharmaceutical majors and generics firms — but it is still a minnow relative to the rest of the company.

It is also innovating into alternative battery materials and systems for next-generation fuel cells under a program called eLNO. The L stands for lithium iron phosphate, an expanding cathode material for vehicles. This is my main reason for going back to this stock.

For an old company, Johnson Matthey is very ambitious, planning to expand return on invested capital to 20% across all lines, now only achieved with clean air systems. This will boost eps which has risen steadily by 7.1% in the past 5 years and its dividends, up 7%--both in sterling. It is a science play too.

In its last FY (to Mar. 30), on which it reported last week, Johnson Matthey grew revenues 17% to £14.12 billion on which before tax profits fell 31% to £320 million. Both beat its house forecasts.

However because of buybacks, EPS rose 7% to GBX 80 per share. Note that outside the precious metals business, operating and before tax profits rose fractionally but fell on a per share basis.

The main problem was retirement medical plan credits not repeating, and transactional foreign exchange gains being offset by higher taxes and finance charges. Its 2017-8 dividend will not go to new shareholders, one reason the stock is weak now. I paid $94.40 per share, equal to two London ones.

As a venerable player Johnson Matthey has a strong balance sheet, with net debt of £689 million at the end of the fiscal, including post-tax pension deficits, a big problem in British mid-caps.

Its cash flow (earnings before interest, taxes, depreciation, and amortization) is 1.1x its net debt. I want to own more auto-linked stocks despite the trade war worries about the sector. I am a contrarian at heart.

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