Johnson Matthey is inextricably linked with platinum. For perfectly understandable and justifiable reasons, however, the company has spent a lot of time in recent years explaining to investors that there is much more to the company than the price of the precious metal.
It was, therefore, a little unfortunate that JMat had to admit yesterday that its sparkling interim profit numbers owed quite a lot to increases in the cost of platinum. Its rule of thumb is that a 10 per cent movement in the price of the precious metal translates into a £3 million shift — up or down — in annualised operating profit.
In the half to September 30, however, the impact was rather more. On its own, JMat’s Precious Metal Products division delivered a £6.6 million increase and although this is not entirely attributable to platinium, it is the part of JMat most sensitive to swings in the cost of the mineral.
The company explained that its rule of thumb was sent out of kilter because the price of platinum had risen both far and fast. The metal has moved up in price by 50 per cent this year. Trading is fairly thin, too, so there can be sudden swings — it moved 10 per cent in a day earlier in the week.
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If the price of platinum moves down as quickly as it moved up, JMat could find itself with an unexpectedly large shortfall in profitability. But platinum would also have to move down in price erratically. At the same time, platinum remains a red herring in the overall JMat story. Long-term growth is much more dependent on the development of platinum usage.
It is well-known that platinum is needed in the manufacture of catalytic converters. Cats are fitted as a matter of course to new cars across the developed world, but US legislation that will come into force on January 1 obliges the components to be fitted to new lorries as well.
Industrial applications are burgeoning and JMat simply hands on, or hands back, the cost of platinum when delivering these products to motor manufacturers. It might be thought that the rising cost of platinum would encourage the development of other technologies that reduce exhaust emissions, or that the strength of the demand would encourage margin-thinning competition. But technological expertise creates barriers to entry. Besides, JMat is also engaged in a constant search for new applications. Carbon-less fuel cells present some of the most exciting possibilities. Buy.
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DSG International
The World Cup was good news for DSG International, helping the electricals retailer to sell millions of large televisions. So it seems a little odd that the world champions, Italy, have been its downfall in the first half.
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Far from celebrating their team’s win with a spending spree, Italians have been rather nervous about potential tax rises and their caution, as well as logistical problems at DSG’s UniEuro chain, led to a slump in sales.
It is possible to argue that this disappointing peformance is negligible in the wider group, which is still dominated by Currys and PC World in the UK. The real shock could be seen as the strong recovery at PC World, which produced its first rise in underlying sales for two years after strong back-to-school sales.
Moreover, with 70 per cent of DSG’s profits coming in the second half, which includes Christmas, the problems experienced in the past six months could be a mere sideshow. Yet the issues at UniEuro do shed light on the risks involved in expanding abroad for retailers and sends a reminder that DSG is still recording a loss in many of its overseas outposts. Even at home, it is clear that slowing growth in the sales of flatscreen TVs as well as logistical issues that affected the supply of large kitchen appliances had an impact on Currys. DSG argues that it is sorting out the internal problems at UniEuro, and electronic gifts are likely to be big sellers for Christmas. However, the Christmas chickens have not yet hatched and it is a brave investor that counts them ahead of time.
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Argos, Tesco and new entrants such as Amazon and Play.com are all driving heavy price competition in Currys’ and PC World’s markets, while underlying retail costs such as rent and rates continue to rise. Shares offer a decent 4.3 per cent dividend yield but, at the equivalent of 16 times expected earnings per share, the attraction thins. Sell.
Clapham House
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The restaurant sector has been a hive of activity of late, with companies such as Carluccio’s, Tragus Holdings, Paramount, Wagamama, The Restaurant Group and Gondola Holdings all in the headlines for various reasons.
Almost unnoticed, David Page and Paul Campbell at Clapham House have quietly built the AIM-listed restaurant operator into another PizzaExpress (at which both once worked).
The shares, which floated at 100p three years ago, are now trading at 268p, while the company has gone from zero to 66 outlets. But there is plenty to come. It has identified 100 target sites for its Gourmet Burger Kitchen brand, 45 for The Bombay Bicycle Club and 20 for The Real Greek. Such rapid expansion can be risky, but the appetite of private equity firms such as Cinven for restaurants adds to the attractions. Buy.