The Investment Column: Johnson Matthey shines with metals expertise

Wincanton; Synergy Healthcare
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The Independent Online

Our view: Buy

Share price: 1963p (-76p)

This is something you won't hear too often: a non-oil company happy with the price of the black stuff, and even willing it up higher.

Much of the specialty chemical and environmental technology group Johnson Matthey's work is based on catalyst technology for diesel engines. As the price of oil rises, more people are switching away from expensive petrol-run cars to cheaper diesel transport. Last year 53 per cent of new vehicles sold in Europe were diesel-powered; five years ago, only 30 per cent of all cars ran on diesel engines.

The environmental arm contributed £1.1bn of total group sales of £1.8bn last year, if you exclude the rise in precious metal prices. The company posted an overall 16 per cent increase in annual pre-tax profits yesterday.

The surge in the price of platinum, which has risen from $1,400 an ounce a year ago to as high as $2,100 an ounce during the past 12 months, has also helped. The cost of the metal can be passed on to customers in the environmental business. In the precious metals division, Johnson Matthey acts as sole distributor for the miner Anglo Platinum, and takes a commission from the sale price. The group also benefits from the difference in the buy/sell spread.

All this makes the company a good defensive stock. The worry for investors is that it already trades at a premium to the market, which the chief executive, Neil Carson, concedes.

The company's brokers at Merrill Lynch say that the shares should rise to 2100p in the next year, not much beyond the high of the last 12 months of 2093p. However, analysts at Cazenove say that earnings per share will grow by 14 per cent next year, versus a historical average for the company of 8 to 10 per cent. They add that given the flood of environmental legislation expected in the next few years, the group "has the right credentials to be well supported". Buy.

Wincanton

Our view: Hold for now

Share price: 305p (+9.25p)

The haulage and logistics group Wincanton could be a gem for investors, but only if a planned takeover of TDG goes well. The company is hoping to buy its rival, having made an indicative offer of 290p a share on 9 May.

The market hates the idea of the merger, which watchers at Dresdner Kleinwort say is an unnecessary move for the group. It has hitherto done well out of smaller bolt-on buys, they add. However, despite the stock falling more than 20 per cent since the approach, Dresdner does say that the buy could make sense at the right price as it would lead to important cost savings and synergies. The right price might be tricky as the private equity firm Laxey Partners is also in the hunt.

Aside from the takeover, the chief executive, Graeme McFaull, says that buyers need not be concerned about the cost of fuel as the company is able to pass on the higher cost to customers. However, most companies are crying out about the cost of energy and are less likely to need as much haulage during a downturn. Mr McFaull says the group is offering more efficient services, but that will still mean that less money is spent with the firm.

On the plus side, the group is improving its European business, which has toiled in recent years and is undervalued considering its past performance. The Dresdner watchers say that the group will trade at 10 times its price earnings ratio next year, well behind historical levels of 17 times in some years. They argue that the shares could reach 520p within the next 12 months.

Wincanton, which yesterday reported annual pre-tax profits of £36.7m, up from £32.6m last year, would normally be a solid investment option. However, investors should wait until at least 20 June, the Takeover Panel's put up or shut up date, before buying. Hold for now.

Synergy Healthcare

Our view: Buy

Share price: 715p (+36.5p)

Many of the healthcare companies listed on the Alternative Investment Market (AIM) have great science but little business sense. Whenever there is a profits warning, and there are many, the whole sector is dragged down.

That is what Synergy Healthcare, which provides non-clinical services such as sterilisation, thinks anyway. It is why the group is planning to leave AIM and move to the main list next month. The change is planned to give the group, which posted a 48 per cent increase in annual pre-tax profits yesterday, greater exposure to more investors, who would do well to take a look.

According to UBS, the stock is undervalued, and could rise to 1030p within a year. They say that the growth of the company's international business, especially in China, bodes well. Those at Brewin Dolphin are a little more circumspect, arguing that the shares will trade up less dramatically to 814p. They say Synergy will deliver 20 per cent earnings per share growth.

Most observers agree that the international expansion is a good move for the group. A good move for investors would be to buy the stock now before the move to the main list.

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