PM Bolt-On: One for the train! SXX (limited) & Johnson Matthey (JMAT) absent of depth, amateurish and lacking substance, but all the same.

Good Evening,

After a lot of communication regarding Sirius Minerals (SXX), to save replying to everything. 

There's two cases for SXX, one that the longer-term holders whom do not feel the need to trade and can see the value over 5+ years and those short-termers with a differing view. 

Without reading too much into the news today, there's no reason to change ones view. SXX was a case of sell on the approval news on the 1st July. The directorate change and market move update should be welcomed by the longer-term holders. One suspects its getting very near a price where there's a reason to buy. 

With an impending Main Market listing on the London Stock Exchange, this should support SXX's value in raising near £550-700M (pending which way you turn the can). With the strength of the U$D as well, its likely any international investors may be pleased with such an investment.

In the absence of some significant corporate action or fundraising news, SXX with be mothballed, although one may have some purchases near lower prices. It would be very disappointing if this stock couldn't benefit from the potash position and being viable well below the potash current market price. 

Johnson Matthew (JMAT) had Q1 trading update last Wednesday, with the woes of the industry being evidenced by the results. The EMC: JMAT Coverage has been criticised for being absent of depth, amateurish and lacking substance. Those views may be correct, but what has been covered has validated the viewpoint not to hold the stock long and/or short. (See results). 

			Q1	Q1		%
			2015/16	2014/15	%	at constant
			£ million	£ million	change	rates
Sales excluding precious metals (sales)
Emission Control Technologies			478	444	+8	+6
Process Technologies			130	119	+9	+8
Precious Metal Products			85	101	-15	-16
Fine Chemicals			78	78	-	-4
New Businesses			38	18	+107	+126
Eliminations			(12)	(11)
Group sales			797	749	+6	+5
Underlying operating profit1			103.6	103.6	-	-1
Underlying profit before tax1			94.0	95.0	-1	-3

¹ before amortisation of acquired intangibles, major impairment and restructuring charges, profit or loss on disposal of businesses.

JMAT may be the world's largest auto catalysts maker, but having rested on its laurels and not acquired into key markets, it’s lacking diversity.  In revenue terms the drop in profits is more significant that the sector gave credit for. Not only is JMAT impacted by multiple foreign currencies but the decline in PGM prices. This may change sooner than people think, pending on the outcome of Lonmin (LMI) and its backers. (Risk Event)

The question for investing in the bull case for JMAT is whether they are likely to benefit from the European regulation on emissions. Yes undoubtedly, but this is slowing more so and a much more progressive company called Umicore (EBR: UMI) is winning space.

UMI is cutting into JMAT’s competitiveness (Margins). The cycles on Heavy Duty Diesels (HDD) have peaked and the Chinese woes are creating more risks. With Europe’s HDD market in contraction its going to create further pressure. Fleet ages are suggesting an extension on ownership and renewal cycles of near 12-15%, but only a 1% up on 2009 figures. Perhaps truck recovery and parts are the way forward? GKN?

UMI have been able to benefit from location, reduced FX woes and the Euro 6 catalyst production both for passenger cars and heavy duty diesel applications. UMI are expanding into JMAT’s bread and butter environment that is also declining/under pressure. This should be a concern for any JMAT holder, a cash return is simply an acknowledgement the business will be purely cyclical based on demand on its undiversified offerings.

JMAT’s bull case is the cash return, dividend and longer-term performance, but in the absence of one large acquisition, they face being an also ran to the progressive UMI.  So with cash in the bank from  Gold and Silver Refining Business for £118 million and another £256 million for the Research Chemicals Business (Alfa Aesar) by the end of the year. JMAT will have £374M available plus borrowings to go on the acquisition trial.  

It would perhaps be sensible to expand, as catalysts are at risk from ‘alleged’ greener eco-models laden with batteries. The weakness in current events and risks being ascribed to the macro environment will assist JMAT. They are in a position to leverage and warrant a premium to their stock. The caveat being, any small scale acquisition (unless in numbers) will question why JMAT sold its Gold and Silver Refining and Research Chemicals businesses.  

Punished for lacking diversity in technology, metals prices and outlook but economic uncertainty. Time for a management change? No change in position until news. Although, UMI are likely to be under-pressure as well, but one for another time. 

Atb Fraser