Broker tips: Johnson Matthey, BHP Billiton, Spectris

The speciality chemicals and sustainable technologies group last Thursday reported a 5% decrease in full year pre-tax profit to £418.2m, beating forecasts of £415m. Efforts to cut costs and an exceptional impairment and restructuring charge of £141m hit profits.

Net debt was reduced by £319.5m despite funding a special dividend of £304.5m.

Revenue rose 7% to £10,7m, boosted by a strong performance at its emission control technologies (ECT) business and progress in new business and fine chemicals. It offset sales declines in other parts of the group including process technologies and precious metal products.

The firm expects slightly higher earnings in the coming year, saying the regulatory push for cleaner vehicles would bolster demand although competition would be intense.

“Near term earnings per share growth looks unlikely to be scintillating, so the investment case needs to look more to the medium term drivers and the potential in Europe especially as Real World Driving Emission standards oblige original equipment manufacturers to use Johnson Matthey to develop far cleaner diesel vehicles,” said Numis analyst Charles Pick.

“A major shift away from diesel vehicles in Europe would be costly, whilst automotive markets are cyclical and weak Chinese demand may remain a feature for some operations for some time to come.

Pick added: "Our target price has been amended to 3138p (from 2995p) based on a suggested multiple of c.16x estimated calendar year 2017 diluted earnings per share of around 196.1p."

BHP Billiton has been rated as 'outperform' with a target price of 1050p by Credit Suisse as it said the company's investment case still holds after the Samarco disaster.

"BHP Billiton's oil business is setting it apart from the sector peer group and the company recently outlined positive FY17 cost and volume guidance," Credit Suisse said.

Samarco Mineração SA -- a joint venture between BHP Billiton and Vale SA -- was held accountable for a November 2015 dam burst in Brazil that left 19 people dead and the town of Bento Rodrigues destroyed.

"While a significant and upmost serious issue, we do not think Samarco has the potential to undermine our overall positive view of the shares at this stage," said Credit Suisse, noting it awaited release of the more detailed full investigation into the tragedy.

"In our view, the incremental implications of this report are probably limited for BHP Billiton (but not positive), and we await release of the more detailed full investigation."

The brokerage said its modelling allowed for $1.0bn in cash outflows for BHP Billiton in coming years relating to Samarco over coming years, meaning this should cover $2bn in total expenses should the Samarco JV company not have sufficient cash available.

It added that with the full investigation into the causes of the disaster still not completed and released, it might be a "little premature to think that Samarco should be restarting operations anytime soon."

Credit Suisse added that BHP Billiton was well-funded.

"Under spot oil, iron ore and copper prices, and within the dividend and capital expenditure guidance, BHP Billiton should have $7bn-plus of free cashflow for the year to June-2017."

Spectris was navigating tough market conditions, like many of its peers, but management had also been restructuring the business to capture long-term secular growth in the markets which its serves, analysts at ShoreCap said, leading them to initiate the shares at a 'buy'.

Furthermore, although margins were at a low point, ShoreCap analysts Ben McSkelly and Robin Speakman, said they perceived a recovery back towards historic levels which would allow the specialist instrumentation and controls business to leverage a secular growth trend around the mid-single digit level through the cycle.

The company's new 'final assembler model', by which it outsources nearly 90% of is manufacturing, together with strict capital allocation, should allow margins to return to historical levels, the broker argued.

Valuation-wise the stock was also 'attractive', ShoreCap noted, offering investors "a strong (indeed inefficient, in our view) balance sheet", with a net cash position set to emerge over the next year or so.

In turn, that meant Spectris had the financial muscle necessary to be active in M&A, with a small bolt-on and strategic deals likely, with management having indicated a stronger move into services, according to McSkelly and Speakman.

"We expect a stronger trading environment to emerge over the next year, noting that the enterprise value/earnngs before interest, taxes, depreciation and amortisation multiple for fical year 2017 falls to 9.0x with a 6.4% free cash flow yield funding a growing dividend stream."