Investment Column: Johnson Matthey has formula for growth

Headlam; Craneware

Our view: Buy

Share price: 2,016p (+78p)

Johnson Matthey's investors have become accustomed to the company making all the right noises when it updates the market. And yesterday it did not disappoint.

The speciality chemicals operation, which refines platinum and is the world's biggest maker of catalytic converters, has enjoyed a buoyant start to its financial year – sales (excluding precious metals) motored ahead by 12 per cent to £617m while underlying profit before tax jumped by 19 per cent to £98.2m.

The group's precious metal products division has been reaping the rewards unlocked by high metal prices. But it should be noted that demand for its products has also proved strong.

Then there are those converters: the key environmental technologies division (which makes them) posted a 14 per cent rise in sales along with a "similar" improvement in operating profit. Light-duty catalysts had a tough time of it – no surprise given the disruption to the car industry caused by the unfortunate Japanese earthquake and tsunami.

And not all metal price rises help the group, such as the rise in the cost of the rare earth resources used in the catalysts. But the shortfall was more than made up for by a rise in demand for heavy-duty diesel catalysts.

What we particularly liked about yesterday's statement was the group's confidence that the first-quarter performance will continue through the rest of the year – and this has been a company that usually delivers on such predictions.

Turning to the share price, we bought at 1,877p in November 2010, having been long-term supporters of the business, which has delivered for us. That said, the shares are no bargain – they trade at 14 times forecast full-year earnings, against a sector average of about 11 times.

However, Johnson Matthey is well positioned in good markets and yesterday's statement was notably more upbeat than some rivals'. It's a tough call, but on balance, we'd keep buying.


Our view: Buy

Share price: 285p (+9.75p)

Headlam, the European floor-covering distributor, has, like the retailer United Carpets, bucked the downturn in the carpet market by rolling out stellar figures for the first half of the year.

While some, including the UK market leader, Carpetright, have struggled recently, Birmingham-based Headlam has powered ahead and delivered group revenues up by 5.5 per cent for the six months to 30 June.

Analysts at Peel Hunt said the result was "excellent" in what the distributor's management called a "flat" market, particularly in the UK, where its like-for-like sales surged by 7.4 per cent.

While Headlam is benefiting from not having shops on the high street, the company deserves praise for maximising its relationships with retailers and contractors through the 47 brands it sells to them.

That said, like-for-like sales on the Continent rose by a less stellar 4.5 per cent over the half-year. However, we note that analysts raised their profit forecasts after yesterday's update and that the shares were as high as 354p as recently as January. It's also worth noting that Headlam trades on what is a relatively modest forward-earnings multiple of 11.6 times.


Our view: Buy

Share price: 575p (+8.75p)

Craneware is a bit of an oddity in that it is based up in Edinburgh but sells only to customers on the other side of the Atlantic.

The company describes itself as the "market leader in automated revenue integrity solutions for the US healthcare market". Translated, this means Craneware has developed systems to help hospitals to bill their customers more effectively.

It said yesterday that revenue for the year to the end of June was expected to meet growth forecasts of 34 per cent to $28.4m. Adjusted profits are expected to come in at about $7.6m as management said its ClaimTrust acquisition had started to contribute.

The group hailed the signing of two contracts to hospital groups this year, with the majority of the revenues recognised in future years. These helped to contribute to the company positively revising its revenue "visibility" for the next three years.

Although it trades on a punchy valuation of 36 times forward earnings, falling to 25 on the estimates for next year, Craneware boasts an enviable momentum, which should underpin the share price.

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