MARKET COMMENT
The FTSE's Best Kept Secret

By David Kuo (TMFDragon)
November 28, 2002

Johnson Matthey (LSE: JMAT), a recent entrant to the FTSE 100, and the 88th biggest company by market capitalisation, is what is known as an industry survivor. Its corporate history, which dates back to 1817, has not always been entirely blemish-free, though. There are still many who remember the bad times when its banking unit, Johnson Matthey Bankers, nearly went belly-up in 1984. That debacle might have dragged down the entire company had it not been for the timely intervention of the Bank of England. However, all that is behind the company now and Johnson Matthey, one of the first assayers of gold bars, appears to be going about its business in a quiet and almost undetected manner.

Today Johnson Matthey delivered its interim numbers. Underlying profit was up 3% to £95m on turnover that slipped 15% to £2.2b. Operating profit was 5% higher at £99m providing the company with a healthy inflow of cash to the tune of £116m. The decline in turnover reflected the tough market conditions at a couple of the company's business units. The catalysts and chemicals division, for example, saw a sharp drop in revenues. That fall, due largely to the drop in palladium and rhodium prices, accounted for much of decline in overall group revenues.

Weak palladium and rhodium prices also affected its precious metals division, though demand for platinum helped to cushion the fall. Fuel cells, on the other hand, enjoyed a buoyant six months and the company now expects to make commercial progress in the medium term. Structural ceramics also saw good sales growth but the best performer was the pharmaceuticals materials division. Contribution from Macfarlan Smith, formerly Meconic, and the UK's only legal maker of heroine, boosted sales in that division by 63% to £66m.

Johnson Matthey is never going to set the world alight, which might perhaps explain its low valuation. The company is valued at 14 times 2003 profits and has a dividend yield of 2.9%. However the investments that it has made in the catalyst industry and also into fuel cell technology position it well for the future. It seldom crows about its success in these areas and often keeps it head well below the parapet. It is perhaps the FTSE's best kept secret. There is a belief, though, that the US could soon follow Europe's move towards the recognition health problems caused by air pollution. That would be positive news for Johnson Matthey, for its catalyst business and also for its future earnings.