Blue Chip: These chips still taste good

Johnson Matthey has plotted a course into the heart of the booming semiconductor market

Johnson Matthey is remembered by old hands for its infamous banking division that went spectacularly bust in 1984, and was subsequently rescued by the Bank of England.

Although that catastrophe is no more than City folklore nowadays, those events set in motion a change of direction that has left many puzzling about its final destination - until recently. Evidence that the group, under chairman and chief executive David Davies, is nearer to reaching the end of its journey came in its preliminary figures earlier this month.

There Mr Davies spelt out a direction for Matthey: electronics and ceramics would be the backbone of future growth, with catalytic converters for car exhausts and precious metals providing the cash.

Whether City investors remain as keen on the shares, however, is debatable. Last week, Minorco, the South African-owned natural resources group, sold its near-10 per cent stake in the group for pounds 132m. The deal, arranged by SBC Warburg, was not away as quickly as one would expect of a share in demand - especially given that it is a fairly illiquid stock. It may suggest lingering doubts about the strategy or disenchantment over the premium rating of the shares.

Either way, the key to its future lies with its decision to rely on the fortunes of the international semiconductor market. Computer chips may have suffered from a slump in prices, following a supply glut. But Matthey has steered a middle course that depends on continued growth in the demand for chips, but which it hopes will avoid commodity-style fluctuations in chip prices. Semiconductor demand is set to grow rapidly, between 15 and 20 per cent, until the next century.

Matthey's big move came last year when it paid $170m (pounds 109m) for ACI, a maker of multilayered printed circuit boards (PCBs). The deal was funded by a pounds 117m rights issue - its first for 10 years. ACI is the third largest supplier of PCBs in the US, but the spice is in its subsidiary, Acsist, which makes plastic laminate packages for semiconductors. These are simply the protective package in which the semiconductor itself is set. The total market for plastic laminate packages is worth barely $200m, but it is growing at the phenomenal rate of 100 per cent a year. The packages are traditionally made from ceramics, and it is a further measure of Matthey's scope that this area of the ceramics market is worth $2bn.

More ammunition for its assault on the semiconductor market came in March, when it paid $40m for the PCB manufacturing business of Cray Research - the world's leading designer of supercomputers. Matthey says the deal gives it instant revenues from Cray, which has agreed to buy its PCBs from Matthey. Yearly sales to the electronics industry are now more than pounds 330m - up from pounds 258m in 1995, and an insignificant amount a few years ago.

It has also told the City it expects to boost volumes at Cray from 2,000 units a week to 1 million units a week by March of next year. Although sales will rocket if these figures come true, the rise in profits will be tempered by higher costs to support the growth. Finally, Matthey has a head start on the opposition; there is no US-based competitor to Cray operating in the market.

In its other divisions, growth will be steadier, if less spectacular. Catalytic converters, an offshoot of its traditional platinum group metals business, and a market Matthey pioneered, suffered last year after General Motors, its largest customer, cancelled a sizeable contract. Profits of the division fell 24 per cent to pounds 26.2m. But R&D into new applications for catalytic converters looks set to pay off, with clean-up devices now on sale for diesel engines.

Elsewhere, a ceramics joint-venture with Cookson has also been on a roll. Operating profits rose 54 per cent to pounds 23.8m - helped by cost cuts and strong Far Eastern demand for tiles.

The puzzle is how much the share rating - which is on a fairly demanding prospective p/e of 17 times next year's earnings - reflects hopes, and how much is realistic. The group has enjoyed strong earnings growth over the past five years. From pounds 66m in 1991, pre-tax profits hit pounds 102m this year - albeit, only a 6 per cent rise on 1995.

The shares have enjoyed a strong performance over the past five years. But with the prospects for ACI and the PCB businesses, it would seem churlish to leave the convoy just as things are getting exciting. Trust Mr Davies and his management to keep the group firing on all cylinders, and buy the shares.

Johnson Matthey

Share price 629p

Prospective p/e* 17.4*

Gross dividend yield 3%

Year to 31 Dec 1994 1995 1996 1997* 1998*

Sales (pounds bn) 1.955 2.177 2.530 2.685 2.815

Pre-tax profits (pounds m) 65.3 95.4 102.2 118.3 137.8

Earnings p/share 23.5p 33.4p 34.4p 37.3p 42.9p

Dividend 11.4p 13.5p 14.5p 16p 17.5p

* NatWest Securities forecasts

Start your day with The Independent, sign up for daily news emails
News
peoplePair enliven the Emirates bore-draw
Arts and Entertainment
tvPoldark episode 8, review
News
Britain's opposition Labour Party leader Ed Miliband (R) and Boris Johnson, mayor of London, talk on the Andrew Marr show in London April 26
General electionAndrew Marr forced to intervene as Boris and Miliband clash on TV
News
news
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence