Date: Wednesday 21 Jul 2010
Charles Stanley remains equivocal about the investment appeal of the shares of Johnson Matthey, despite a generally robust trading performanceThe broker believes that Johnson Matthey’s prospects are far from certain. “We note that US sales continue to perform positively, but that economic conditions are likely to deteriorate. We note, too, that Brazil sales have started to slip, for the first time in over a year while the European passenger car market remains extremely tough and that Asia remains highly competitive. More positively, truck production has held up well.,” said Jeremy Batstone-Carr, director of private client research at Charles Stanley.
The outlook statement from the company indicates that despite easy fiscal second quarter comparative figures, prospects for the second half of the fiscal year remain hard to predict with any accuracy, in Batstone-Carr’s view.
The broker is sticking with its earnings estimates for the current year and maintaining its “hold” recommendation.
“We recognise the potential benefits associated with future emissions legislation in heavy duty diesel but suspect that this is already well known by the market,” the broker said.
Commerzbank has reiterated its neutral stance on household goods maker Reckitt Benckiser after the company announced the earnings boosting acquisition of foot care and prophylactics maker SSL.
“Combining SSL’s strong brands (Durex and Scholl) and Reckitt’s distribution power should allow paying £2.5bn, i.e. an EV/EBITDA [enterprise value/earnings before interest, tax, depreciation and amortisation] 2011E [2011 estimate] of 15x,” Commerzbank suggests.
“The deal should increase EPS [earnings per share] by 3% this year due to low funding costs. However, given the current tough consumer environment in Europe which should be reflected in the Q2 [second quarter] results we maintain our Hold rating,” Commerzbank Andreas Riemann said.
According to Reckitt, synergies should amount to £100m by the end of 2012. “In light of £126m operating profit this seems an ambitious target in our view but could add another 5% to EPS,” Riemann adds.
The third quarter update from Euromoney will probably lead to consensus pre-tax profit forecasts edging up to £80m, predicts Singer Capital Markets, despite the business publisher and events organiser sounding a note of caution on the prospects for the fourth quarter.
“The company has flagged up caution on Q4 [fourth quarter] as it will be driven to a large degree by advertising in September, which faces a tough comp [comparative figure]. The recent weaker profitability of large banks is also a reason for caution and we maintain our view that investors should focus on the September update,” suggests Singer analyst Johnathan Barrett.
Despite the cautious management comments Barrett thinks the broad picture is encouraging and the return to growth in subscriptions will bolster confidence for the next fiscal year and underpin faith in the business.
Singer has a “buy” recommendation on the shares with a 12-month target price of 708p.
KBC Peel Hunt is also a buyer, and expects earnings forecasts for the current year will edge up as a result of the trading statement.“If we pencil in 8% growth in Q4 (down from our original 11%, and half the rate of Q3 [third quarter]), in line with company comments, this suggests a revenue upgrade of £5m, and (with 40% drop-through) a PBT [profit before tax] increase of £2m. This would give PBT of £80m and EPS [earnings per share] of 50p,” KBC analyst Malcolm Morgan said.
“We do not anticipate changing our FY2011 numbers, given the economic uncertainty,” Morgan added.
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