Berenberg raises price target on 'trusty' Johnson Matthey

Analysts at Berenberg upped their target price on diversified chemicals outfit Johnson Matthey on Monday, noting that contrary to what the intraday share price reaction might lead one to believe, the group's 2019 results marked a pleasing continuation of a two-year-long pattern of "trusty delivery".

Berenberg highlighted that in a year in which every other chemicals company exposed heavily to an automotive name issued a profit warning, Johnson Matthey's adjusted EBIT actually rose 8% to £566m - 1% ahead of consensus expectations.

"The good results at Johnson Matthey will last longer than the market scepticism," said Berenberg, which raised its target price on the group from 3,600p to 3,750p.

The German bank, which also reiterated its 'buy' rating on the group, said the key takeaway from Johnson Matthey's results was that the firm was set to grow consistently.

Berenberg also feels cash flow concerns will ease, with the market, in its view, having fallen back into "a depressingly familiar pattern" of fixating on negatives, such as lacklustre cash flow, which was just above breakeven owing to refinery outage and higher palladium prices.

"This is clearly a temporary development. After the construction of new Polish and Chinese facilities, estimated at circa £90m apiece, and a smaller Indian facility (£50m), we expect capex in autocatalysts to normalise at close to a mere 4% of sales from 2022."

The analysts also made minor changes to their estimates in order to reflect a more favourable FX environment in 2020, which they expect to be offset in subsequent years by "modestly higher interest and corporate costs".

Despite that, the roll-over of its sum-of-the-parts and discounted cash flow valuations meant that their target price rose.

They also pointed out how the shares were trading at over a 20% discount to the historical European chemicals sector's valuation in terms of the shares' implied 2020 price-to-earnings multiple "despite higher levels of earnings growth and returns".