Fundamental Analysis Of Johnson Matthey Plc In Essay Format.

Comparison of Revenue of Johnson Matthey Plc to its peer competitors

Johnson Matthey Plc is a UK based company which is involved in providing catalysts and catalyst system in order to reduce emissions from vehicle and industry. It provide services through three principal segments namely clean air, efficient natural resources and other type of markets involved .

Johnson Matthey Plc has a market Capitalisation of 3514.51 Million with a total shares outstanding 185.52 Million. The company has a forward PE ratio of 9.08. It has a dividend yield of 3.79%. The total book value of shareholders’ funds which includes share capital, reserves and any preference shares 2685. It is very much common to see difference between book value and market value due to involved various factors which includes the operating model of the company ,market sector ,specified attributes of company .The form of assets and liabilities also need to be considered and taken into account .On other note ,the book value is the money value that shareholder would receive if company assets were liquidated and liabilities to be paid off .Market value is basically the company value as per market on basis of current stock price of company and shares outstanding in total . (reuters.com, 2022)

The debt-to-equity ratio as per the book value is 0.51 and if one consider the market value the same shall be much lower as the market value of equity is much higher than the book value. The company beta is 1.27 which symbolise that the stock is riskier than the index. Further, the debt to market ratio of the company is 0.38 (1373/3534). 

In year 2021 the total long term debt is 1300 Million. 

1. Johnson Matthey , a global leader in sustainable technologies investment 50M which will create new job opportunity at its Clean Air plant in Gliwice ,Poland .It will be helpful and will provide capacity for company to provide its customers with a very small batch and also spare parts of its range of important catalyst product which will be helpful to automotive industry to reduce harmful emissions from all types of vehicles .It will help to optimise company Clean Air global manufacturing footprint and will form a world that is cleaner and heathier too for future generation to come .(matthey.com, 2022) 

2. The company also expects to report its full year result in line with expectation of market : 

• All the operating performance to be in line as per expectation of market
• Good performance in Clean Air and Efficient Resources
• A continuous form of investment into Hydrogen Technologies to help in future growth.
• A proper review of strategy and at same time update for same need to be provided with whole year result.(Matthey, 2022)

It is the policy which the company uses to structure its dividend pay out to company shareholders. It is a part of the company strategy but there is no obligation to repay the shareholders on basis of dividend. Even though investors are aware of the fact that the companies are not required to pay any dividend, many consider the same it a bellwether of that individual financial health. Generally there are three type of dividend policy:

• Stable Dividend Policy : It is one of the most common form of policy which is used .The goal of the policy is steady and predictable form of dividend pay out to be done in each respective year ,that is what most of the investors try to seek. In this case, whether the company is earning gain or loss, investors will receive dividend.

The major goal is to align the dividend policy with the company long term growth rather earning .This policy provides an assurance to investors regarding the payment of dividend on timely form and manner. 

• Constant dividend Policy : At time of boom an investor may not be able to see a boom in dividend in years to come .Under this policy , company are entitled to pay a percentage of its earning as form of dividend each and every year .Though this form ,an investor experience a full form of volatility of the earning of company .

A large earning earned, investor earn a large portion of dividend and vice versa. The biggest drawback involved for same id the volatility involved of earning and dividend .This is very much difficult to plan when income of dividend is very much highly volatile. 

• Residual Dividend Policy: This policy is also highly volatile, but few investors see the same as the only acceptable form of dividend policy .Through this policy, the company pays out the dividend remains after payment of CAPEX and working capital involvement.(geektonight.com, 2022)

Important news that could be of significance to potential investors and the impact it may have

This policy makes the most sense in terms of operations of business .The public are not willing to invest in a company that justifies its increased debt with the requirement to pay dividend.

Date	Dividends
08-06-2017	54.5
30-11-2017	21.75
07-06-2018	58.25
29-11-2018	23.25
06-06-2019	62.25
28-11-2019	24.5
18-06-2020	31.125
26-11-2020	20
10-06-2021	50
02-12-2021	22

In case of the company it may be inferred that company has bene regularly paying dividend to its shareholders but such dividend is not consistent and varies with the profit level of the company. Further, the pay out ratio of the company is also not consistent. Thus, only dividend pay out is consistent but the amount and degree of the pay out is erratic and depend on range of factors. The annual dividend figure has been presented as under:

Date	Dividends	Cumulative year
08-06-2017	54.5
30-11-2017	21.75	76.25
07-06-2018	58.25
29-11-2018	23.25	81.5
06-06-2019	62.25
28-11-2019	24.5	86.75
18-06-2020	31.125
26-11-2020	20	51.125
10-06-2021	50
02-12-2021	22	72

Based on above payment pattern it may be inferred that company has regularly paid dividend to its shareholders but has not followed any strict pattern or policy i.e. it has not computed dividend as percentage of EPS or a similar amount of dividend has been paid to shareholders. The amount of dividend has fluctuated and payment has been made as board deemed fit. Accordingly, company has moulded the theories as per their requirement while constantly paying the dividend. The above regular dividend payment depicts the stability and is commonly associated with dividend signalling theory which states that company which regularly pays dividend sends out both positive and negative signal. Under positive signal, one may consider that company expects stable future growth and by dividend distribution management assures the investor that similar cash flow may be expected in the future.

On the negative side, the distribution of dividend by management shows that company has no good projects in hand on which such cash may be utilised and thus the future growth of the company is restricted and thus company has bene regularly paying dividend to its shareholder. In the case of Johnson, the top line i.e Revenue has growth over 50% in the period of 5 years which is a symbol that company has not stagnated. 

Cost of equity, cost of debt and cost of capital (WACC), using the capital asset pricing model 

Cost is equity is the rate of return which company pays to its shareholders. It is used to assess the attractiveness of investors which includes both internal and external opportunities for acquisition. In this case ,the cost of equity is computed using CAPM model which considers the investment riskiness relative to the market as whole .This CAPM model is consider to provide less exact information due to estimates made in the computation . (CFI Education Inc., 2022) 

Dividend Policy

Cost of debt is the rate of return which is company usually provides to its debtholders and creditors .These investors need to be given compensation for any risk exposure that comes along with company lending .Cost of debt helps to compute the WACC of the company .It reflects the default risk and interest rates level in the market . ( Wall Street Prep, Inc, 2022)

WACC ascertain the cost of each part of the capital structure of the company on basis of proportion of equity, debt and also preferred stock it has. Each has an involved cost to it .It is the discount rate , corporation uses WACC as a hurdle rate in order to evaluate mergers and acquisitions ,at the same time financial modelling of internal investment involved . If an investment opportunity has lower IRR as compared to WACC, it shall buy back its own share value or dividend need to be paid out instead of doing investment in any particular form of project. (Wall Street Prep, Inc, 2022) 

Discuss the variables you use to estimate the cost of capital 

The variables which are used and considered to estimate the cost of capital are as follows:

• Risk free rate of Return: It is the return which is expected actually from risk free investment, in this treasury rate of return can be used. 

• Beta :It measure the systematic risk of asset as compared to market involved ,the same can be computed and can be found using regression :dividing the asset covariance and the return of market by the variance of the market involved .(CFI Education Inc., 2022)If the computed: 

Beta < 1: In this the Asset is very much less volatile as compared to the market as whole . 

Beta=1: In this the asset volatility is also the same as that of the market. 

Beta >1: In this the asset is more volatile as compared to the market. 

• Expected return of market: It is basically the average return of the market involved over a defined period of time involved. 

Beta is less than 1 it means that the asset is very much volatile in form and 

In the present case, the computation of WACC has been made by considering the beta quotes on Yahoo Finance and i.e.1.27 which means company carries more risk than the exchange. Further, the yield on 10 year bonds has been considered as risk free rate as 10 year period reflects the period of stability. The return on index over the period of 30 years has been considered and the same has averaged at approximately 8%. Considering the above variables, Capital Asset Pricing Model which is a linear model has been applied to determine the expected return of the equity shareholder of the company and the formula used is Rf+ Beta*(Rm-Rf) and the rate has been worked out at 9.65%.

Further, cost of debt working has been made by considering the current interest paid and the average of the present year and last year debt to determine the cost of debt. Further, Cost has been adjusted with the tax deduction as interest provides tax shelter to the company. Against the above methodology, the cost of debt has been worked out at 8.68%. 

Cost of Equity, Cost of Debt and WACC using CAPM

Weighted average Cost of Capital has been computed by using the weight of debt and equity in the capital structure and the corresponding cost of these instruments as discussed above. The computation has bene made using market value of equity and book value of debt as majority debt of the company are in the form of bank debt whose book value is equal to the market value. The weight of equity and debt in the long term capital structure has been considered at 72% and 28% approximately. Against the above information, the weighted average cost of capital of the company has been computed at 9.38% and thus for any project to be selected by the company the return must be greater than 9.38% or it may also be inferred that the minimum return which must be earned by the company from the projects shall be 9.38%. However, one may note that the return on asset of the company is below the rate of cost of capital and thus company is losing money from projects. 

Shareholder value analysis (SVA) is an approach to financial management ,which focuses on creation of economic value to shareholders and the same is measured by performance of share price and funds flow .It is basically lead by the principle that the company management shall take into consideration the interest of shareholders and advantages before any decision is taken by them ,also frame the short and long term objectives and helps to decide the strategy of company as well .SVA consider and take into account longer term view and is also about measuring the cash flows over a period of time .The computation of SVA is done by ascertaining the total net value of the company and division of same by the shares value .Once the value of same is computed the company can defined targets and also objectives for improvement purpose and also measures its managing performance. (mbaknol.com, 2021) 

In order to manage and create shareholder value, these factors need to be explained by seven key value drivers that need to be managed in order to maximize value of shareholder.

1. Sales growth rate
2. Operating margin of profit
3. Income tax rate involved
4. Working capital investment involved
5. Fixed investment of capital involved
6. Cost of capital involved(cbsnews.com, 2007)
7. Growth rate value
8. Residual value of future cash flow involved

In the present case of Johnson Matthey Plc, the key variables which has been used for computation of Shareholder value today and in expected future involves operating profit margin and the weighted average cost of capital which has been computed in the previous task. The weighted average cost of the capital has been quite high as compared to the margins of the company. The company has very high weighted average cost of capital as compared to margins of the company. The top line of the company has seen a good growth over the period of 5 years as the revenue has increased by 50% in a period of 5 years despite two years being pandemic. However, the margins of the company has been dwindling on account of increased competition and increasing cost of the company. The gross margin of the company has been declining on year on year basis and has been below the industry average and similar impact has been seen for net operating margin and net profit margin. Thus, the major driver for shareholder value analysis depicts that company has no residual wealth and the computation for the current year has been presented as under:

Sl No	Particular	Amount
1	EBIT	323
2	Tax	-61.37
3	NOPAT	261.63
4	Cost of Asset	726.2
5	SVA	-464.6

Based on above computation, it may be inferred that company is constantly eroding the wealth of its shareholders on year on year basis and the erosion of the current year stood at 464.6 Million $. Thus, based on current erosion rate it is expected that market capitalisation of the company shall decrease from the present amount which stands at 3.534 Billion and the computation of erosion in the wealth has been presented as under: 

Sl No	Particular	2022	2023	2024	2025	2026	2027
1	Residual Amount	-350	-250	-150	-150	-150	-150
2	Terminal Value						-1599.55
3	DF	0.9143	0.8359	0.7642	0.6987	0.6388	0.5840
4	PV	-320.0	-209.0	-114.6	-104.8	-95.8	-1021.8
5	NPV	-1866.0
6	Present Market cap	2685
7	Expected Market Cap	819.0

Based on above computation, it may be inferred that wealth of shareholder may erode in possible future as company is not expected to earn higher than the weighted average cost of capital over the possible future and thus shareholder of the company are expected to loose money over the period.

The data used is the historical company financials and the computed weighted average cost of capital of the company under part 3. Further data for operating profit after tax has been considered from the financials of the company and so is the details of asset of the company. Against the above data, the residual margin has worked out to be negative and adjustment has been made for future years considering that the said depletion shall decrease over the period and stabilise at some lower value considering the financial performance over the past years and recovering of economies globally post the pandemic. However, it is not expected that company shall report an exceptional results and the return on invested capital of the company to exceed the weighted average cost of the company. Thus, the forecasts of the company are not very optimistic on account of company past performance and the competition in the market.

SVA value differs to the real market value 

The real market value of equity in this price of share is multiplied by the number of shares .Any increase in equity market value in one year is the equity value of market at the yearend less the equity market value at previous year end. The market value of equity is also known as capitalization.

Shareholder value added this is the increase in sales value and the same is multiplied by incremental threshold spread ,the same is adjusted by using rate of income tax and the division of same by the represent value of cost of capital .

The value of the share computed is much lower than the present trading price of the shares of the company as in short term market is moved more by sentiments rather than rationale and it takes time for market to adjust to its original price. The shares of the company are valued considering the cost of capital and the operating margin and it is expected that share price of the company shall fall in the near future. The market movements occurs both on account of fundamental analysis and human judgements. The human element involved is subjective which results in different valuations for the company and thus there is no one set price for the company on account of different set of assumptions involved under the valuation model. Further, in the market there are lot of other assumption which are not factored in the model. Thus, the real price of shares are not expected to tally with the model price. However, one can ascertain the direction or flow of the share price of the company in the expected future based on the model workout. 

Investors use SVA tool in order to judge the profitability of the corporation and efficacy of management .The value of shareholder is created when the profit of company exceed the cost involved .It depicts the income that the company has earned in excess of funding cost involved .It possess a number of benefits, it uses NOPAT, which is basically based on operating profit and minus the saving in tax that arises form usage of debt. This ultimately erodes the financing decision effect on profits and also allows for a peer comparison of companies regardless of financing decision which is being adopted .In computing the same Net Operating Profit After Tax deducts extraordinary items and is a more precise measure than the net profit of the company ability in order to generate profit from normal business operations. 

Synergy is a concept which allows two or more involved corporations to combine and either form more profit or reduction in cost together .It is believed that companies combining provide more benefit than single and doing same. (Vaidya, 2020)

On July 19 2021, the company has announced the acquisition of assets and intellectual property of Oxis Energy Limited. The company Oxis Energy Limited was a lithium-sulfur battery developer with assets which can be adapted for the manufacture of components for green hydrogen production. The above acquisition with moderate investment is expected to scale up the business of the company and shall help the company to be further sustainable.  The above acquisition shall help the company to further strengthen its base and increase the market share in the green hydrogen business industry and shall also help the company to develop, test and accumulate catalyst coated membranes and advanced materials of electrolysers. The said market is expected to develop phenomenally over the future on account of current positive response from the market. Further, this site shall help the company to enable the production of 10000 catalyst coated membrane parts per year and this is sufficient enough for equipping hundreds of megawatt of electrolyser capacity. Further, the proposed acquisition is also expected to benefit the battery business of the company and help the business to advance its development of future battery material technologies. The company Oxis Energy Limited has a large base of IP portfolio in next generation lithium sulfur and adjacent battery technologies. Thus, the above acquisition is a mix of vertical and horizontal integration and shall help the JM to further increase its market presence in green hydrogen and the battery sector.

The synergy shall arise on account of increased revenue and decrease cost due to innovations in the company and large scale production capacity of JM. The technology of Oxis can be mixed with JM to generate synergy on account of benefits of economies of scale. Further, lot of IP shall help the company to be first mover and shall eliminate competition in the market.

The premium paid is justified considering the expected revenue and cost of the company over the period of times. The acquisition shall help to improve the financial performance of the company which has been dwindling over the period of time. The current acquisition shall also help the company to meet its goals of zero emission in the near future.

Conclusion

Based on above discussion, it may be inferred that Johnson Matthey has been experiencing a strong growth in revenue over the past year, however, the company profit has been decreasing over the period and the margin has fallen to 2-3% of turnover. Also, the company has no fixed dividend policy and the debt has been increasing in the capital structure of the company over the period. The dividend policy shows both positive and negative signal and the shareholder value analysis of the company depict a constant erosion of the base capital of the company. Thus, based on above details it may be inferred that there has been reduction in the value of shares of the company in the expected future.

References

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matthey.com, 2022. Johnson Matthey invests €50m creating new jobs at its Clean Air plant in Gliwice, Poland. [Online] Available at: https://matthey.com/en/news/2022/50m-investment-clean-air-poland[Accessed 18 April 2022].

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