The bull case is easy. The tougher the rules about exhaust emissions, the more money there is to be made for Johnson Matthey.
This insight is easily gleaned from yesterday’s annual results, with Johnson Matthey’s emissions control technologies division — that’s catalytic converters to you and me — reporting a 21 per cent rise in underlying profits. And the latest European regulations governing the emissions of nitrogen oxides are tougher than ever.
Scratch the surface though and there may be trouble ahead for the company. Its results yesterday conceded that diesel’s share of the European car market was likely to fall from its present 52 per cent, albeit gradually.
Catalytic converters generate more than half of the group’s profits, with Europe representing the largest part of that division. A shift away from diesel in its largest market could have an impact on Johnson Matthey’s bottom line. At the moment it derives six times the value from a new diesel car as from a petrol car.
The other businesses, which represent 43 per cent of revenue, were more patchy. The precious metals products business, where Johnson Matthey’s roots lie, suffered from the expiry of a cosy long-term supply agreement with Anglo Platinum, the South African platinum division of Anglo-American. Anglo had the misfortune of entering into a long-term supply agreement with Johnson Matthey about 15 years ago, when the platinum market was very different. The ending of that contract has taken about £30 million off the Johnson Matthey bottom line. In the process technologies division, which is the next largest after emission control technologies, it struck a cautious note on weak demand from China.
In the meantime, it is paying a princely sum to pursue new businesses: its R&D budget is maintained at more than 5 per cent of sales and its new business division lost £22 million on a £91 million turnover last year, with plans to break even by 2017-18. It is most excited about the potential of the lithium-ion battery market for electric vehicles. But its core business, catalytic converters for diesel engines, remains exposed to political whim. At 17 times next year’s forecast earnings, the shares don’t look compelling.
Profit £440m
Revenue £10bn
MY ADVICE Avoid
WHY Johnson Matthey is a complex beast. It has good positions in markets set for growth. But it is exposed to diesel’s fall from favour
Mahatma Gandhi once remarked that the moral progress of a nation could be judged by the way its animals were treated. If you’re on board with his philosophy, then Britain seems very civilised indeed.
While rates of pet ownership are fairly flat, the amount we’re spending on pampering our pooches and cosseting our kitties is rising exponentially. Pets at Home reckons that the petcare market has grown from £4.4 billion to £6.1 billion since 2006 and can be expected to increase at a steady tick of 3.5 per cent annually.
Pets at Home’s 400 stores sell live animals, reptiles and fish. The actual trade in creatures is largely speaking loss-making. True profit is in daft treats, such as dog Easter eggs, and “advanced nutrition” food targeted at individual breeds, or at animals with specific health issues — dodgy joints, weak hearts or poor eyesight.
In advanced nutrition, Pets at Home has a 53 per cent market share and faces minimal competition from supermarkets. The company is also benefiting from rapidly growing demand for grooming and for veterinary care and it has an impressive VIP loyalty card that collects data on its shoppers.
The shares, which floated at 245p in early 2014, have been tepid performers, partly because of a perception that the company was overpriced by its private equity sellers. They slipped 5p to 275p yesterday. Nevertheless, annual profits, on an underlying basis, were up 9.6 per cent to £121 million. The stock is on 16 times forward earnings.
Revenue £729m
Dividend 2%
MY ADVICE Buy
WHY Pet care market has promising growth trends
In 2009, most investors would not have touched Sirius Real Estate, then known as Dawnay Day Sirius, with a bargepole. The German real estate group was heavily leveraged and had a costly externalised management agreement with Dawnay Day, a large shareholder that filed for administration during the recession.
Today Sirius is a completely different investment case. Andrew Coombs, chief executive, has been cleaning up shop since he joined in 2010. He has internalised the management, refinanced more than €200 million of debt, lowered its cost of capital and sold off non-core properties.
The company sought a dual listing in Johannesburg and about 40 per cent of the investor base is South African. Sirius also raised €40 million in December and yesterday launched a €50 million private placement. Funds will help to buy more sites and developments for German tenants. Sirius now has a portfolio valued at €550 million and its rental income is continuing to rise.
With a total shareholder return of 13.5 per cent last year, an in-house management team, conservative loan to value ratios, rising rental income and a progressive dividend, Sirius is a clear buy.
Dividend 84 cents
Profit €12.6m
MY ADVICE Buy
WHY After an overhaul, performance is picking up
And finally . . .
Ever wondered how many pies you can buy with £542,000?
Richard Hutton, the finance director of Greggs, the pie and sausage roll retailer, might know. Yesterday he exercised options over £2,000 of shares, which may be only a wee dollop of dough but comes after he sold about £540,000 of shares last month.
With analysts weighing in with “buy” options on Greggs, Mr Hutton has clearly decided to take some profits. However, he still holds 77,923 shares, which were valued yesterday at more than £925,000.
