Now it has parted company with non-core businesses such as chemicals and gold and silver refining, the driver for Johnson Matthey is its emission control technologies division — more than half the business — which provides catalytic converters to the automotive industry.
This is because the other bits of the business, supplying oil and gas, chemicals and other industrial applications, are by their nature reliant on global GDP and investment. Market conditions remain challenging for its process technologies side, which is particularly reliant on the oil industry. Precious metals were hit by low prices of platinum and palladium.
Its emission controls division gained from the Volkswagen scandal and a drive towards tighter emission standards. The number of diesel cars has not declined as fast as some had expected on European roads because of the affair; indeed, numbers have barely fallen at all, and this, too, is an advantage.
That business, though, is heading into a short hiatus in terms of new regulation being imposed in the EU. This will pick up again in 2018 as new rules come into force. The other driver will be the move towards better air quality in China and, to a lesser extent, India.
Johnson Matthey is best seen these days as a specialist technology company based around catalytic chemicals that is seeking new applications for these. It has a new business segment, at present lossmaking, looking at those applications in batteries, water, fuel cells and atmospheric technology.
It is instituting cost savings of about £34 million a year, much of these within that process technology side. As a global business it should be able to cope with Brexit. Indeed, the lower pound will add £25 million to profits if it holds there.
The first-quarter figures showed little change in profits on sales up a couple of percentage points, and the full-year figures will look pretty much the same in advance of those forex gains. In February Johnson Matthey paid a 150p special dividend. Unless some compelling M&A targets are identified, there will eventually be another payment, but not soon. The shares ended up 28p at £31.75. They sell on about 16 times earnings and look about fairly priced.
MY ADVICE Avoid
WHY The shares look fairly valued, with some industrial markets still challenging and the emissions side heading for a temporary hiatus
Electrocomponents
Electrocomponents is certainly delivering on the promises made to investors in its effort to raise the operational performance and margins, to the point where the electronics distributor is even beginning to talk about strategic acquisitions again. The big news in its market since the company last reported, though, is the bid for Premier Farnell, its quoted rival.
This should have no significant effect on its business. The most encouraging signs from yesterday’s annual meeting update was a rise in margins of 30 basis points despite a currency headwind and indications that the promised cost savings, £15 million this financial year and £25 million next, are coming in faster than expected.
This will push margins ahead further in due course, while the lower pound is on balance a benefit. Against this, the markets where it operates remain mixed and are providing little help, with the US still sluggish. The shares shot ahead 26p to 284½p on the statement. They sell on 18 times earnings. I rather feel I have missed the bottom of the market on this, and that rating looks full enough for now.
MY ADVICE Avoid
WHY Shares have come up a lot and look fairly priced
Restore
No one is allowed to say too much about it but a van bearing the livery of the Harrow Green removal service was briefly filmed amid the comings and goings in Downing Street last week. The business is about a fifth of Restore, an AIM-quoted company that has grown from next to nothing over the past six years, carrying out 26 acquisitions.
It bought Harrow Green in 2012 and has done three transformational deals in the past couple of years. The last was the records storage side of Wincanton, the logistics group, last year. The latest is the £83 million purchase of PHS Data Solutions, a specialist in document shredding with a small storage business.
Restore aims to provide a range of services to office managers, from storing those documents for years, shredding unwanted ones and removals. These are areas where small acquisitions bring advantages of scale and which are highly fragmented. Restore is now in second position in the market in storage and shredding and No 1 in removals, so there is probably not another big deal available.
The acquisitions are still feeding through into cost savings and increased profits.
Future earnings should be highly visible and there are obvious opportunities to cross-sell. The latest deal provides the necessary critical mass in shredding that was not there before. The placing to support it was at 290p. The shares jumped 34p to 322p, which indicates the City’s approval of it. They sell on 15 times earnings. One for the long term.
MY ADVICE Buy
WHY Economies of scale from putting businesses together
And finally...
I have suggested before that IQE, the Cardiff producer of gallium arsenide wafers, is not properly understood by the stock market. The positive halfway trading update certainly seems to have come as a surprise. Revenues and profits will be up significantly and the balance sheet is being strengthened, while deferred payments for earlier acquisitions are coming to an end. IQE is diversifying to become less reliant on wireless. The shares were up by 24 per cent. Perhaps the takeover of Arm will focus minds better in future.
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