Investment Column: Johnson Matthey still has more to offer
Sportingbet; Hampson Industries
Thursday 25 November 2010
Our view: Keep buying
Share price: 1,877p (+37p)
When we turned positive on Johnson Matthey in the summer, the platinum refiner's shares were trading at under 1,600p apiece. Given the gains seen over the past few months, is it time to bank profits?
The bull case certainly received a boost yesterday, when Johnson, which doubles as the world's largest supplier of catalytic converters, issued a storming set of results. Half-year pre-tax profits were up by a heady 44 per cent to more than £164m, ahead of City forecasts. The strength was underpinned by the benign combination of higher platinum prices and demand for catalytic converters. The former is down to the rebound on the commodity markets, while the latter was underpinned by the recovery in the auto industry. Building on its strength, Johnson upped its interim dividend by 13 per cent to 12.5p, something which will have pleased income investors.
Management also struck a confident note on outlook, with performance over the second half expected to be broadly in line with the first six months of the year. That said, Johnson will face tougher comparisons, as auto sales over the second half of 2009 were propped up by Government incentive schemes. We do not consider that a reason to sell, however, as analysts remain fairly bullish on platinum prices, which should continue to help the business.
Moreover, Johnson still trades on undemanding metrics. Despite recent gains, the shares remain on multiples of under 15 times Deutsche Bank's forecast earnings for next year. As we highlighted in our last note, the historical range is between 15 to 17 times, meaning Johnson is still trading at the lower end of past trends. Recent gains demonstrate that the market has begun warming to this business – but the metrics show it has to yet give the stock the rating it deserves. Keep buying.
Our view: Avoid
Share price: 61p (+0.9p)
We've been bearish on Sportingbet, the internet bookie which lost nearly a quarter of its value after chief executive Andrew McIver said it was not for sale, for some time.
Any reason to change? The sporting betting business itself is ticking along nicely (but try and get an account and you'd wonder how), but poker is being hammered by the likes of Full Tilt and Pokerstars which still operate in the US and have been aggressively promoting their businesses here. Casino, too, has been battered by the recession. Still, in the first quarter the amount of money wagered increased by 11 per cent, net gaming revenues were up by 5 per cent ,while pre-tax profit grew £2m to £8.5m, meeting forecasts.
The risks are acquisition and regulation-related. Sportingbet would like to buy or merge with rivals which could add new territories or enhance its mobile offering. There are also ever-present dangers of some of the countries in which it operates taking exception to the company (it's happened to rivals). Spain and Greece could do with the revenues deregulating (and taxing) gambling would bring but it's what they do and how they do it that isn't clear. At nine times 2011 forecast earnings, the shares are inexpensive. But the risks are too high. Avoid.
Our view: Speculative buy
Share price: 28p (-1.75p)
Hampson Industries, the defence and aerospace parts group, signalled in August that first-half profits would fall "materially below current market estimates", sending its shares down 65 per cent. Yesterday's results for the six months to the end of September filled in the details – adjusted pre-tax profits down by 64 per cent, operating profits by 70 per cent, the interim dividend cancelled. The stock duly lost another 6 per cent.
But for canny investors, Hampson is starting to look like an opportunity. If only the newly installed chief executive – Norman Jordan, from Labinal – can put his plans into action, the company may put its troubles behind it.
In amongst the bad news were analyst-beating revenue rises of 4 per cent, indicating renewed signs of life in the market. Hampson's slashed trading profits of £7.8m were also still considerably higher than the £6m forecast in August. The group also recently won a record $53m (£34m) tooling contract from Boeing, renegotiated banking covenants, and is looking to pay down debts. It's still a big risk but we'd make it a speculative buy.
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