The Investment Column: Johnson Matthey looks compelling

Worries over high values makes Brixton too risky - Chesnara's closed funds will pay hefty dividends
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The Independent Online

Johnson Matthey is cleaning up. In Europe and the US, legislation is forcing the manufacturers of heavy-duty diesel vehicles to cut engine emissions. It is the industrial equivalent of the introduction of catalytic converters as standard to cars in the Nineties, and Johnson Matthey - which makes the chemicals used as catalysts - is expected to enjoy some impressive sales growth over the rest of this decade as a result. The performance of the catalysts division was once again the highlight of a company trading update yesterday, helped by the growing popularity of diesel cars in Europe.

Johnson Matthey is cleaning up. In Europe and the US, legislation is forcing the manufacturers of heavy-duty diesel vehicles to cut engine emissions. It is the industrial equivalent of the introduction of catalytic converters as standard to cars in the Nineties, and Johnson Matthey - which makes the chemicals used as catalysts - is expected to enjoy some impressive sales growth over the rest of this decade as a result. The performance of the catalysts division was once again the highlight of a company trading update yesterday, helped by the growing popularity of diesel cars in Europe.

Johnson Matthey operates in several exciting medium- and long-term growth areas. As well as catalysts, where the screw of emissions legislation grows ever tighter, it also has a strong business making ingredients for drugs, where an ageing population guarantees growing long-term demand. That division was a poor performer in the financial year just ending, unfortunately, because one big-selling drug (the anti-cancer treatment carboplatin) dramatically lost market share to copycat rivals. But these blips will become less significant as the division grows in future years.

An offsetting positive was the performance of the precious metals division, which refines platinum and where strong demand for the metal has kept prices high.

Buyers of Johnson Matthey shares are also taking an option on the emergence of fuel cell technology, where hydrogen can be used as an alternative to traditional energy sources. The group makes parts for experimental fuel cells in a division that could soon break into profit and be a dramatic plus to the group in the long-term.

Earnings this year will have been held back by the fall in the dollar, but will still be ahead of the 12 months to March last year. A dividend yield of just below 3 per cent is behind the market average, but with Johnson Matthey's future prospects looking so strong, the balance of growth and yield makes the shares look compelling.

Buy and tuck away.

Worries over high values makes Brixton too risky

It is not just middle-class dinner party guests who have obsessed over property prices these past few boom years. Institutional fund managers, too, have had to consider increasing their investment in property, whether big residential developments, retail outlets or commercial property. There has been a boom in investment that has sent the value of property companies' portfolios soaring.

Brixton owns 25 million sq ft of commercial property - business parks and warehouses mainly in the South-east. It is a good collection of assets, with land around Heathrow airport and, increasingly, in the North. But the company's chief executive, Tim Wheeler, has - like this column - expressed concern that values are too high. He - and we - spoke too soon. Mr Wheeler put it charmingly yesterday. "We are living through significant times. The weight of money coming into the property investment market has continued and, despite the concerns we have voiced about the market and its ability to sustain ever decreasing yields, there has been further yield compression in the second half of 2004."

Brixton's asset value rose 14 per cent in 2004, but the sub-3 per cent dividend rise shows its continuing caution.

Brixton, like other property shares, has also been boosted by the prospect of conversion to an investment trust, but this long-term tax benefit will have to be paid for upfront. Sell.

Chesnara's closed funds will pay hefty dividends

Chesnara once sold mortgage endowments to the customers of the Countrywide estate agency chain. Spun out of Countrywide last year, it is a rather unusual stock.

The life book is now closed, and the company has no burning ambition to grow its small, guaranteed bond business - the only part of the company which takes on new customers. It is hard to understand, on first impressions, why anyone would want to touch a stagnant business like this.

But the beauty of closed life books is that they generate a steady cash flow - in Chesnara's case, providing the funds for its enormous 10 per cent dividend, as well as allowing it to put some extra cash aside.

Already, the company has 25 per cent more capital than it needs to satisfy the regulators, and says it is on the lookout for other small closed life books to buy to add to its existing one. However, if the right deal does not come along, its management say they really don't mind - they'll simply return the cash to shareholders.

Chesnara expects 80 per cent of its life customers to disappear - as their policies mature, or they decide to move elsewhere - within 10 years. But it will almost certainly be snapped up by one of the bigger closed life book groups in this consolidating sector well before such erosion becomes a worry.

Chesnara is barely followed by the City's analyst community and so there are no earnings forecasts for the current year yet. The shares trade on 30 times the earnings for 2004, reported yesterday, but that year included an unexpectedly large provision for mortgage endowment mis-selling compensation, which is unlikely to be repeated. Buy.

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