Johnson Matthey firms up bumper dividend

Half-year results at Johnson Matthey were pretty much in line with expectations. A special dividend, however, was far bigger than expected, and investors are piling back into the catalytic converter manufacturer following a recent savage de-rating.

Matthey made a pre-tax profit of £208 million in the six months ended 30 September, 4% less than a year ago, on revenue up 4% at constant exchange rates to £1.59 billion.

The core emission control technologies (ECT) division, responsible for catalysts used in cars and trucks, had a blinder - an 8% increase in sales to £939 million was no surprise, but a 16% surge in underlying operating profit grew to £136 million was about £13 million more than expected.

Tighter legislation to control nitrogen oxide emissions in diesel cars drove European sales of catalysts in so-called light duty vehicles up 17% to £339 million. They were up sharply in Asia and North America, too.

Heavy duty diesel (HDD) catalysts for trucks rose 1% as demand for huge juggernauts in the US offset a slump in business with farmers and oil explorers.

(click to enlarge)

Elsewhere was a struggle, however, with profit at both the precious metal products (PMP) and process technologies (PT) divisions at around £36 million, down 31% and 28%, respectively. Both missed forecasts by miles. A 20% slump in precious metal prices clipped demand for services like refining at PMP, while supplying chemical catalysts to the oil industry is a difficult business to be in right now.

A slowdown in the Chinese chemicals sector hurt, too. It's why Matthey plans to start slashing costs early next year, mainly at PT, by £30 million a year. 

Still, Matthey completed the sale of its Research Chemicals business to Thermo Fisher Scientific at the end of September. The £255 million price tag netted Matthey a profit of £131 million, and management had already said shareholders would benefit.

A bumper dividend

And they have, by more than expected. Around £305 million will be handed back by way of a special dividend of 150p a share, far more than the £200 million pencilled in by analysts at Bank of America Merrill Lynch (BoAML). That's on top of the ordinary payout, up 5% to 19.5p

It's easily affordable, too, given the company sold its gold and silver refining operations to Asahi Holdings earlier this year for £118 million. Indeed, management decided that there are "ample resources" to fund both research and development and capital expenditure. And Matthey's net debt/cash profit ratio of 0.7 times is way below the firm's 1.5-2.0 target range.

Matthey is a new entry into our winter portfolios this year, on the basis that its share price tends to outperform between November and April. It has risen every year for the past decade and by an average of almost 16%.

And despite "the harshest derating story in the sector this year," according to BoAML, they’re up over 3% since 31 October following an 8% rally on these results.

BoAML expect a dip in adjusted earnings per share from 177p to 146p in the year to March 2016 before a recovery the year after. That puts Matthey, at 2,668p, on a forward price to earnings (PE) ratio of 18, dropping to less than 15 on 2017 estimates. A ratio of about 15.6 times calendar-year 2016 estimates is still not far off the bottom of the historic range. It peaked at over 27 in 2010 and bottomed-out at 15.4 two years later. Last year it was about 17.8 times.

For the record, BoAML believes Matthey shares could be worth 3,300p. Citigroup suggests a fair value of 3,600p. Clearly, getting here will take perfect execution on restructuring and success and turning round underperforming divisions.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.