Johnson Matthey refines itself

The Investment Column
Johnson Matthey is best known as the world's largest gold refiner and the pioneer of platinum-based catalytic converters, but the business is gradually changing. Though platinum still runs through 75 per cent of the business, chairman David Davies is reducing the group's dependence on the more mature uses of the precious metal and using the cash generated in higher-growth areas.

The more mature applications include the distribution and marketing of the metal and its use in catalytic converters, though there is some growth left in supplying diesel car catalysts.

The main growth opportunities are in biomedical applications, such as anti-cancer treatments, ceramics and electronic materials used in the manufacture of micro-chips and semiconductors. From next to nothing five years ago, these three businesses account for 40 per cent of JM's earnings.

The past year has seen good progress in this direction after two sizeable acquisitions. Last August, JM acquired Advance Circuits, an American manufacturer of printed circuit-boards, for pounds 109m. This March it paid pounds 27m for the circuit-board operations of Cray Research, another US group. The deals were funded by a pounds 117m rights issue, the first cash call in 10 years.

The wisdom of the diversification policy is underlined by last year's results. Though pre-tax profits edged up 6 per cent to pounds 102m in the year to March, all the divisions improved their contribution apart from catalytic converters. Here the loss of a General Motors contract at the beginning of 1995 meant profits slumped 24 per cent to pounds 26m. Though the traditional precious metals trading business saw profits nudge 9 per cent higher at pounds 44.6m, the new businesses performed more strongly.

Electronic materials increased profits by 36 per cent to pounds 25.5m. ACI, the new US purchase, contributed pounds 4.2m in six months. Cookson Matthey Ceramics, the joint venture with the Cookson group, also had a good year, improving profits by 54 per cent to pounds 24m.

The five-year transformation of Johnson Matthey has been reflected in the share price which has risen from 285p to yesterday's 648p, up 9p. With UBS forecasting profits of pounds 124m this year, the shares are on a forward rating of 16, a 20 per cent premium to the market. Hold.