Johnson Matthey (JMAT LN): catalysing growth


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Johnson Matthey (JMAT LN), P GPB 24.1, Market cap. GBP 4.7b, Target P 31.3 (30% upside)

Business: leading manufacturer of automotive catalysts, industrial catalysts, recycles precious metals and produces fine chemicals. Demand for catalysts remains robust over the medium term, driven by tigher emission contrl legislation. However, operating profit in the y/e 13 March 2016 is forecasted to decline (Blb Consensus -15%) due to temporary headwinds (weaker demand in Oil & Gas applications, diesel emissions VW debacle, disposals).
Currently stock trades on trough earnings valuations (P/Eest x13.6, EV/EBITDA x6.7), a 40% discount to the European Chemicals sector (EV/EBITDA x9.1) and a 32% discount to the closest peer, Umicore (UMI). JMAT used to command premium valuation over UMI reflecting the higher ROIC (17% v 8.6%).


Emission Control Technologies (ECT): Manufactures catalytic systems for vehicle emission control, heavy duty diesel. (61% of group sales, 54% of group EBIT)

Diesel catalysts: US risk exacerbated, only 0.5% of the US new cars run on diesel, post VW debacle the US is becoming a single model market mostly represented by the mid-sized pick up truck ‘Dodge Ram’ (Liberum 4/12/15). EU demand remains robust, diesel represented 57% of new car sales.
Tightening regulation will require more sophisticated catalyst systems, adding roughly 20% to the revenue per unit (guidance by JMAT, UMI, BASF). Since Sep. 2015 that EURO-6 regulation became effective automakers are required to reduce CO2 emissions from 130 gm/km in 2014 to 95 gm/km by 2020. Testing standards will be further raised in 2017/18 with Real Driving Emissions tests simulating real-driving conditions. This tight regulatory environment creates a strong growth catalyst for ECT. ASP for passenger vehicles costs USD 320 – 510 per unit, for light duty trucks USD 420 -500 per unit.

Process Technologies: Manufactures catalysts used in industrial processes, applied in petrochemical industry, gas processing, refineries. (18% of group sales, 18% of EBIT). Although some of the activities were affected by softness in Oil & Gas industry (44% of revenue), demand in Diagnostics applications remains robust and management guides towards growth in next year, alongside a recently announced cost-cutting programme expected to trim fixed costs by 20% of divisional EBIT in 2016/17.

Precious Metal Products (PMP): Specialises in platinum group metals refining / recycling and marketing / distribution. Sources metals from spent catalysts. (9% of group sales, 12% of group EBIT)

Fine Chemicals:  develops bio-catalytic technologies and active ingredients for pharma customers (9% of group sales, 16% of EBIT): manufactures active ingredients for the pharma industry.

New Technologies: Battery materials, energy storage (3% of group sales, aiming to grow revenue from current GBP 72m to GBP 300m by 2019/20) Lithium demand: Lithium is used in the cathodes of most batteries, used in transportation and renewables. Demand is forecasted to grow at a CAGR of 16% over next decade (Albemarle, ALM US).

Debt: JMAT disposed of the gold and silver refining business together with the chemicals research division for GBP 380m. Most of the proceeds (GBP 305m) were paid as a special divi (GBP 150p per share, ex-date 11/1/16). Even post special-divi, balance sheet appears under-levered with Net Debt/EBITDA estimated at x1 and Debt/Equity at x0.6.


Valuation: Consensus forecasts FY16 EBIT -13%yoy at GBP 460m and Bloomberg suggests analysts’ degrading cycle started reversing with consensus projecting mid-single-digit EPS growth for next 3yrs.
Current stock price implies a potential 30% upside for JMAT to trade at the historical average EV/EBITDA x8.7 and 40% upside if JMAT trades  at similar multiple to European Chems. (SX4P)
Divi 2.9% (ex-special), EV/EBIT x11.3, P/BV x2.4

Next Catalyst: 3/2/16 Trading update (tomorrow), 2/6/16 12M results for y/e 31/3/16

EPS consensus downgrade cycle appears to reverse

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Performance review for 2015

Marks & Spencer, short initiated April, stock is down 20% – making a nice profit

Air Partner, long initiated April, stock up 30%

Dialight, bought July – sold October, +25% (worth taking a second look at current level)

Stock Spirit: bought Dec’15 sold Jan ’16 +32%

Ladbrokes: bought August ’15 still holding +20%

DX Group: bough Dec ’15 still holding -10% (ludicrously cheap)

Average equal-weighted performance for 2015 : +19% (not too bad)

New year’s resolution:
a) post at least once a month, a decent idea
b) read a quality book per month
c) avoid unnecessary investment mistakes



Fundsmith secret of success

Investment criteria:
Pick stocks that:

● that can sustain a high return on operating capital employed;

● whose advantages are difficult to replicate;

● which do not require significant leverage to generate returns;

● with a high degree of certainty of growth from reinvestment of their cash flows at high rates of return;

● that are resilient to change, particularly technological innovation; and

● whose valuation is considered by the Fund to be attractive.

Stock Spirits share price ready for a shot


Stock Spirits (STCK LN) : 

Is a leading vodka maker in Poland with a considerable market share in Czech Republic as well. Trades at a deep discount to peers, after giving shareholders a bad hangover. I think the worst is priced in and current valuation doesn’t recognize the strong cash generation and leading market position. The strong balance sheet should help weather the current de-stocking storm. STC gpo





Market cap GBP 207m (Eur 282m) Net Debt Eur 92m, EBITDA JPM forecasts EBITDA Eur 51m for FY15 and Eur 67m next year.
Valuation: EV/EBITDA x5.6, P/E 15 and forward P/E 12 (cheapest in the sector), P/BV x1.7, ROA 5.7%, ROE 11% (not too bad), Divi 2%
Revenue: Poland 60%, Czech Republic 20%, Italy 12% (decent exposure to the Eastern European convergence theme)
Management: downgraded profit guidance from Eur 60-66m to Eur 50-54m, which came around 20% below Bloomberg consensus.
Deteriorating trading conditions in Poland:
– wholesales delayed placing new orders, as they had accumulated high inventories ahead of the tax hikes
-Discounters continue to grow faster and stock spirits in under-represented at discounters because it has a premium positioning. Stock Spirits launched
– competition remains intense as Marie Brizard (no 3 player) relaunched its flagship Krupnik brand with heavy promotions in November.
-The key competitor Roust (CEDS – now remained Roust Corporation) discounted heavily as the Russian parent needed desperately the cash tied in inventories, to pay downs their USD denominated debt. Roust had Net borrowings as at 31/124 of USD 882m or x8.2 EBITDA, priced at a distressed coupon 10%. (sooner or later they will have to focus on profits, rather than only volumes – easing pricing pressure )
-Problems in Poland started from the disruption arising the 15% rise in excise duty on spirits on 1/1/14, which added 8% to the retail price. Stock Spirits’ reported revenues fell 8, reflecting de-stocking by wholesalers. But supply flow and stock levels should stabilize as consumer patterns get back to normal
Balance sheet remains robust with sensible leverage and Debt/EBITDA x2.4

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Shareholder list includes some decent names like Shroders, Prudenttial, Capital and Aviva, each of them owning 7% – 8% stakes. Perhaps some of them rushed to the narrow exit door causing the share price to collapse.

12 golden rules from Lord Lee

These are the 12 rules that FT columnist John Lee has followed while building his £4.5m Isa investment portfolio:

1 Try to buy shares on modest valuations — hopefully with an attractive yield and single-digit price/earnings ratio, and/or discount to net asset value.

2 Ignore the overall level of the stock market. Leave the macro outlook to commentators and economists — focus on your own selection.

3 Be prepared to hold for a minimum of five years.

4 Have a broad understanding of the main business activities of the companies you invest in — pick ones that make sense to you.

5 Ignore minor share price movements. Looking back in years to come, you will either have got it right, or got it wrong. Whether you paid 95p or £1 will be totally irrelevant.

6 Seek established companies with a record of profitability and dividend payments (avoid start-ups, biotechs and exploration stocks).

7 Look for moderately optimistic (or better) comments from chairman and chief executive in company reports issued to the stock market.

8 Focus on conservative, cash-rich companies and those with low levels of debt.

9 Ensure the directors have meaningful shareholdings themselves in the company, and ‘clean’ reputations.

10 Look for a stable board with infrequent directorate changes. Similarly with professional advisers.

11 Face up to poor decisions. Apply a 20 per cent “stop-loss” — sell and move on. However, ignore the stop-loss if there is an overall market fall.

12 Let profitable holdings run. Don’t try to be too clever, that is selling and hoping the market will fall to buy back at a lower price.


DX Group (DX/ LN): Delivering Exactly – stock market havoc

dx_tracktor DX Group (DX/ LN) is a UK based parcel delivery group, focuses on next day deliveries. Group’s initials stand for ‘Delivering Exactly’, this time they delivered market havoc. After a profit warning on 13/11/15 the stock price collapsed by two thirds from GBp 86 to GBp 20.

Currently the market cap shrinked to GBP 42.6m. The latest published accounts (30/6/15) show minimal Net Debt at GBP 1.8m, which appears not threatening if we consider the full year EBITDA last year came at GBP 33.7m. In the same fiscal year, DX generated Operating cashflow GBP 27.7m which was used GBP 9.2 in investments and GBP 8m distributed as dividends.

The Chaos begins on Friday 13th of November, when DX delivered an RNS announcement titled Profit Warning that unleashed sell orders and panic.
The document can be found here , management says: a) Revenue in Q1 will be down-5.3%, b) balance sheet remains robust, c) intention to pay a full year divi 2.5p. At today’s closing price, this sets DX at 12% Divi yield – not bad at all.

The house-broker forecasts FY16 EBITDA 20m (1/3 less than last year), this values the group at x2.2 EV/EBITDA and x0.22 P/BV, which could make DX group a lucrative takeover target. Screen Shot 2015-12-01 at 23.12.04

What happened? Management said overcapacity hit pricing and the core DX Exchange documents business is seeing higher than expected levels of volume decline (c. 10% vs initial forecast at 6%). Management also said driver shortages at peak season added to cost pressures.

How bad can it get? Worst comes to worst, DX could start delivering other items than papers, that are similarly time-critical (i.e. internet deliveries, flowers maybe?) I think the market panicked and some big shareholders rushed through the exit door – where there were no buyers.

It is encouraging to see a new shareholder joining the shareholder list, “River and Mercantile Asset Management LLP” bought enough to cross the 5% threshold.

Rivals Royal Mail (RMG LN) and UK Mail (UKM LN), have both reported stiff price competition, probably the market over-reacted as the memories of City Link collapse remain vivid.

LAD I found an opportunity, Ladbrokes (LAD LN)

Labrokes (LAD LN), share price at 1.03 and I think is too cheap, market doesn’t seem to price the potential synergies post Coral merger. 
: LAD operates 2,209 retail shops in the UK and has 0.9m online users. The major competitor is William HIll (WMH LN) which operates 2, 360 shops and has 2.8m online users. WMW was faster in adopting online, after acquiring SportingBet in 2012. Ladbrokes announced a potential merger with Coral and if completed the merged group would become market leader.

Segments: Retail drives 70% of revenue but in first H1 grew by only +1% as customers shift online, Digital contributes 19% and grew by 6.9%, management aims to bring Digital contribution to 30% of total revenue and grow active users to 1.3m with retail growth at +2%

Merger: LAD proposed merger with Coral in an all-share transaction, where LAD will control 51% of the enlarged group. Management projects cost synergies of GBP 65m and emphasises synergies can increase. Coral reported annual revenue GBP 982m and EBITDA GBP 204m with Net Debt GBP 865m. The implied valuation on acquisition, on today’s market price (21/8/15) is at x6.7 EV/EBITDA, which is undemanding comparing to WMW

This transaction will not be dilutive to LAD shareholders, at LAD trades on x8.8 EV/EBITDA (Net Debt GBP 413m and consensus EBITDA of 160m )

Synergies: Last year LAD spent on Marketing GBP 82m and Coral GBP50m (WMH 130m) , if the combined group manages to save 30% on marketing, using a single brand (GBP 40m) That could create an additional GBP 350m to shareholders (values at x8.8 EV/EBITDA or GBP 0.19 per share post merger, 1.78b shares). The existing cost synergies GBP 65m, valued at x8.8 EBITDA and taxed at 25% would translate to an additional GBP 0.24 per share.
Online: The merged group will command 14% market share in online gaming (Coral 10% + LAD 4%), ahead of WMH 12% and 888 7%. In online sportsbook the combined group will have 9% market share, bridging the gap with WMH 16%
Cash generation: LAD is a cash generating business, in H1 generated GBP 76m +38%yoy.
Last year (pre re-structuring) LAD generated 130m Operating cash flows which is a 10.7% yield on current EV

Stand alone valuation:

Consensus: Consensus appears to be skeptical on whether the deal will receive the green light from the competition commission, but puts less emphasis on the fact LAD operates in a heavily regulated industry where Gambling Commission sets ceilings on maximum stakes and taxes GGR. Additionally, most customers turn to online, with the retail market shrinking, weakening the point that a merged group would reduce consumer choice.
Divi Even on consensus valuation LAD tradex on a discount to competition, rewarding patience with a 3% divi.

Dialight LED lighting share price dives into dark, opportunity?

Dialight (DIA LN) share price is down a third YTD
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The story: Dialight (DIA LN), is a small manufacturer making LED lighting for hazardous environments. It used to be priced as a high-growth story, on a P/E in high 20s, when revenue growth hit a speed-bump and management issued a profit warning. Market panicked with share price losing 40% in a single day. However fundamentals remain robust and the business is still in a good shape. I believe Dialight is a bright story deserving some more light

Current Valuation
Share Price : 5.38 Market cap GBP 172m
Dividend Yield 2.8% P/E x18, P/BV x12, P/BV x2.4 Operating profit margin 10%, ROA 9%

Business: Dialight manufactures LED lighting for use in hazardous industrial locations. These lights are used on top of telephone towers, wind turbines, oil & gas plants.
LED lamps comparing typical ‘incandescent lamps’ or ‘fluorescent lamps’ have longer life span and are more energy efficient, analysts project LED lamp market to grow more than 10fold over the next 10 years.
Revenue:  The main segment is Lighting, contributing 52% of total revenue,Signals make 31% and Components 15%. In 2014 revenue grew 46%, driven by stronger volume +40% and improved pricing. In 2014 sold 287,000 lighting units, on average selling price GBP 348.
Market: Dialight sells to industries operating in mining, food & beverage, power generation, oil & gas, petrochems. LED lighting solutions although are more expensive, have a longer life expectancy (15-20 years) and consume on average 50% less energy.
Profit warning  On 10/6 management announced although Q1 exceeded expectations, they’ve noticed a slowdown in new orders, as a results first half revenue and profits will be lower than last year and well below consensus. The newly appointed CEO Michael Sutsko hired an army of consultants to review operating procedures and find opportunities for cost cutting.
Investec broker forecasts a 9% increase in revenue for this year, a 25% drop in profits and a stable dividend, with revenue and profits picking up there-after, indicating this profit warning was only a temporary speed-bump.
In the call, management talked about order delays int the oil&gas clients, as they slash CAPEX seeing lighting infrastructure upgrades as a second priority. I think other end-markets like food and beverage, power plants and infrastructure could help to replenish the order-book. The value proposition for energy saving using LED technology is still intact, enabling DIA LN to find clients in different end-markets
Balance sheet: Dialight has a robust balance sheet, with net cash GBP 0.6m and minimal debt, inventory cycle of 100 days and average debtor days 78.
Free cashflow: Even though Dialight is on expansion mode, increasing capacity last year generated GBP 1.4m freecash flow, as it generated GBP 8.6m in operating cashflows and spent 7.2m of it investing in new capacity.

Peers: Since the profit warning Dialight trades on average 25% lower P/E and EV/EBITDA comparing to similar companies like FW Thorpe (TFW LN), Halma (HLMA LN), LSI (LYTS US), Cree (CREE US), SPX (SPW GR)

Take over target: LED lighting business is in consolidation, as big players like Osram aim to increase market share. In fact Osram acquired Encelium and Acquity bought Pathway. Dialgiht could be an attractive M&A target as apotential buyer, at today’s valuation on EV/EBIT x9 could lock a yield of at least 9%, getting “for free” all the potential growth in the LED market. For us who haven’t got handy GBP 175m to buy-out DIA LN, we can lock a 2.8% divi and hopefully some price appreciation as the LED market pricks up.dia bq

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Air partner .. take profit and fly?

Air Partner (AIP LN) is up +15% since our previous post at the end of April. I feel itchy to take at least some of the profit after an insider sale from the honorary chairman Anthony G. Mach who sold all of his 7.3% stake.  I also see limited value in the Cabot Aviation deal, where management paid x1.7 times turnover (GBP 1.2m) to buy a Jet broker firm.


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Air Partner share price appears cheap, bullish results (AIP LN)

AIP Air Partner Air Partner (AIP LN) reported stellar performance this morning, new management delivers strong results. Share price started reflecting this performance. Net cash stands at 1.83 GBP per share,  or 18.7m Thus enterprise value (EV) at today’s 36.7m market cap. is 18. Air Partner reported operating profit of 2.6m GBP, valuing AIP LN at x6.9 EV/EBIT, a significant discount to Easyjet and Ryanair. Management’s confidence in the future is reflected by the 10% increase in final divi. making the total divi for the year 22.06p or a 6.1% divi.
Net cash balance increased, reflecting the success of the JetCard as pre-bookings came higher. CEO says “the group reported underlying profit before tax of GBP 2.6m which is ahead of the revised market expectations…’. ‘the second half provided a great deal o be positive including a major new contract win in Oil & Gas, which commenced in the current financial year”
I think Air Partner share price remains cheap and undervalued comparing to the sector, offering a well supported 6% dividend yield. A more detailed analysis to follow soon ..

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