The Investment Column: Johnson Matthey dispels all fears

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The Independent Online
Johnson Matthey, the precious metals to pharmaceuticals group, has seen its shares underperform the market by more than a third over the past year as analysts have stumbled over each other to downgrade forecasts. Every worry under the sun has hit the group, from the rising pound to falling computer memory chip prices.

But results in line with expectations, along with news of what looks an exciting deal to exchange know-how in chip technology with Kyocera of Japan, were enough yesterday to dispel all those fears, sending the shares soaring 61.5p to 523p.

Pre-tax profits edged up 6 per cent to pounds 108m in the year to March. Although the figures looked pedestrian, all the pain was concentrated in the Cookson Matthey Ceramics joint venture. This operation set a cracking pace in the first two of its three-year life so far, but the stagnant state of the German construction industry tripped it up last year, cutting profits by 36 per cent to pounds 15.3m.

Demand for zircon, used in making tiles sold into the German market, has dried up with demand and it remains to be seen whether the joint venture's moves to retrench will be enough to turn the corner this year.

But there was plenty of good news elsewhere. Determined management action seems to have ensured that the catalytic systems division, making converters for car exhausts, has fully recovered from the loss of a big General Motors contract in early 1995. Volumes up 9 per cent last year ran ahead of the general auto markets on both sides of the Atlantic and profits leapt 30 per cent to pounds 34.1m.

Even the original precious metals operation, from platinum refining to chemicals, did well, raising profits 4 per cent to pounds 44m, despite lower metals prices. But the real excitement lies in electronics, which shrugged aside the first fall in the market for at least five years to grow profits by 21 per cent to pounds 30.9m. With analysts expecting last year's 10 per cent drop in demand to reverse into 10 growth this year and 15 per cent next, JM should be well placed.

Even more so after the Kyocera licensing deal, which means the Japanese company will help JM meet the huge demand for its "plastic land grid arrays" - the leading-edge technology for encasing microprocessors. Further out, Kyocera will give the British group access to the next generation of chips, which will be bonded directly to the circuit board. The build-up of production in the group's new $100m US plant could hit margins in the short run, but that should be meeting the group's 20 per cent return on assets target within 18 months. In the meantime, group profits of pounds 119m this year would put the shares on a forward multiple of 13. Good value.