Investment Column: Johnson Matthey is a precious investment
Helical Bar; Real Good Food Company
Friday 04 June 2010
Our view: buy
Share price: 1570p (+15p)
We've been cautious about the platinum refiner Johnson Matthey, which issued full-year figures yesterday, and with the benefit of hindsight, perhaps a little too cautious. Back in January we said hold, advising against buying on account of the fact that the shares had made heady gains over the preceding months. However, they have continued to gain ground.
The company's annual results suggested the faith investors have placed in the shares was not misplaced. Yesterday's update brought news of a 5 per cent fall in pre-tax profits to £254.1m. But that was better than the City's forecasts, and the really good news was in the company's report that this year's first-half profits will be significantly ahead of last year's.
So, is it time to buy? On both our recent notes on JM we have recommended a hold. But recently the shares have slipped back a bit following the best part of a year when the only way was up. And, following this fallback, Johnson's valuation is starting to look attractive. At 15 times forward earnings, the stock is trading at the lower end of its historical range of 15 to 17 times, according to Citi.
Given the combination of increasing volatility on the capital markets and Johnson's defensive characteristics, we think that makes this an attractive investment. But if that wasn't enough, the longer-term outlook for the business is just too promising to miss out on, despite the company's words of caution. New emission control laws promise to drive growth for Johnson, which is the world's largest supplier of catalytic converters.
As Citi points out, the heavy-duty diesel market, though dogged by some uncertainty about the timing of the recovery, offers particular grounds for optimism and all European light-duty diesel cars will have to be fitted with catalysed filters from next year (about 70 per cent have then today).
Putting all this together, we are no longer sitting on the fence. Buy.
Our view: Buy
Share price: 297p (+3p)
Helical's results, on the face of it, were hardly exciting yesterday. It hasn't been easy for any property companies, to be fair, but the group's shareholders have been accustomed to it significantly outperforming its peers, and that hasn't really happened. The adjusted net asset value per share of 272p was up just 1 per cent from 270.6p at September, at a time when there have been signs of recovery.
Then there's the valuation, which hardly makes Helical Bar look cheap. At 297p, the shares are trading at a moderate premium to next year's forecast net asset value per share of 294p. Other property companies trade at discounts. So, avoid then? That might be foolish, given the record of Mike Slade, who runs the show and also owns a significant slug of the stock. Helical Bar's positioning is unique and it could find some very attractive opportunities coming its way over the next year or so. That's what the company is positioning itself for in both retail and the City.
If the valuation looks pricey, it should be remembered that the shares are at something of a low ebb, having fallen sharply since testing the 360p level in April. Historically, they tend to trade at a much higher premium than today's level, so it could be argued that there is a buying opportunity here.
It's a risk, given the continuing economic uncertainty, but that affects almost any investment decision. We'll back Slade to bounce back. Buy.
Real Good Food Company
Our view: Buy
Share price: 27p (+0.75p)
The Real Good Food Company, which distributes non-refining sugar and makes of bakery products and ingredients, said yesterday that its performance had been ahead of expectations for the first four months of its financial year. This follows a strong overall performance in 2009, when RGFC more than doubled underlying pre-tax profit to £2.15m, grew earnings per share and slashed bank debt to £20.9m.
The group's Napier sugar business has faced a testing three years after the European Union forced production cuts which led to a slump in the "reference" sugar price over the period.
The company said Napier, whose retail customers include Morrisons, was in a "transitional year" but noted that momentum was starting to build ahead of the October contract season.
RGFC is bullish about current growth rates at its baking ingredients businessRenshaw's, and the Hayden's sweet bakery unit that supplies cakes to retailers including Waitrose and M&S. Furthermore, even after the recent share price rises, the group trades on a tasty looking multiple of just 3.9 times 2011 earnings. Based on that, we think RGFC is a solid buy.
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