Market Report: Johnson Matthey too exposed to auto industry

Speedy Hire; Carluccio's
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The Independent Online

Our view: Sell

Share price: 1,070p (+17p)

Despite what was at best a mixed trading update yesterday in terms of operational performance, the speciality chemicals group Johnson Matthey said that it expects to hit its full-year targets.

That was probably why the group's shares were slightly up in trading yesterday, despite the fact that fourth-quarter sales will fall below those in the same period in 2007: the balance sheet is strong and debt is falling at an impressive rate. Work in its environmental technology arm will be increasingly led by legislative changes in the future, rather than the economy.

A closer look at the company, however, and the investment case begins to unravel. The weak pound is underpinning the on-guidance performance, and one of Johnson Matthey's main industries, automotives, is suffering terribly, and without any end in sight.

The company's shares, which have lost nearly 50 per cent of their value in the past 12 months, have underperformed the rest of the FTSE 100. As watchers at Killik Capital point out, there seems little prospect of conditions improving in the automotive industry in the near term, and "we feel the shares are fully valued". The Killik experts advise investors to get out and move to less expensive peers such as Charter International or Rotork.

Investors may feel more comfortable putting their money into big groups, and there are few bigger in the speciality chemicals industry than Johnson Matthey. Furthermore, in the longer term, investors might do nicely from holding the stock. We think, however, that the group is exposed to one of the worst affected parts of the economy and that the shares have further to fall. Sell.

Speedy Hire

Our view: Hold for now

Share price: 163p (+37p)

Shares in the tool rental group Speedy Hire jumped a stellar 29.4 per cent yesterday when the company announced that it has changed the terms of the covenants in its banking facilities to give the group a bit more slack in these troubled times.

The company said that it has "established more appropriate covenants," which means it has paid its banks to give it more breathing space: a good thing to do, certainly, and an action that led to cheer in the markets.

Before investors get too excited, however, the news on debt rather took the limelight away from the company's fourth-quarter update, in which it describes trading as "difficult", despite having cut costs substantially in anticipation of the tougher markets.

Yesterday was certainly a good day for investors, and the news on Speedy Hire's new debt agreement removes a degree of uncertainty for buyers.

Plenty of uncertainty remains, however. The shares were down 83 per cent in the past year before yesterday's news, and the investors should have concerns about the company's ability to cope with a prolonged recession.

Analysts at KBC say "buy", arguing that trading is ahead of their expectations, but warn that the share price is likely to remain volatile, despite the company emerging as a "relative winner".

We would generally applaud what the group has done thus far, but remain concerned about Speedy Hire's ability to perform in a long recession. Keep the stock, but be careful. It could come back to bite you. Hold for now.

Carluccio's

Our view: Avoid

Share price: 66.5p (+5p)

The finance director of the Italian coffee shop and low-cost restaurant chain Carluccio's, Frank Bandura, says that he will not worry about things he cannot control. As such, the share price is not near the top of his priorities.

That might distress investors who had seen the stock fall by nearly 60 per cent in the past 12 months, before yesterday's trading update led to a 8.1 per cent rise. Aside from yesterday, investors should also be concerned that the market is not listening to the message that Mr Bandura and his colleagues are trying to get out: yes, the economic situation makes things tough, but it is steady-as-she-goes for now. The update said that the group continues to trade in line with expectations, despite being a "consumer-facing" business.

Performing well operationally is one thing, but if the market is not listening, investors will still find themselves backing a loser. Those at Seymour Pierce were as erudite as any other. "We believe that Carluccio's is certainly a long-term winner and should trade on a premium. However, we remain cautious on the prospects [for second half of] 2009 trading for the restaurants sub-sector. On 12 times 2009 price-earnings... we believe that the premium is priced in," they said

If you believer that the economy is set to remain gloomy for some time, Carluccio's should be one to miss for now. Avoid.

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