ii view: Car plant shutdown hurts Johnson Matthey

Covid-19 has damaged profit, but is it a buying opportunity for this clean air play?

Full-year trading update to 31 March 2020

• Covid-19 hit of £50 million
• £250 million of unrestricted cash available
• £1 billion revolving credit facility

Chief executive Robert MacLeod said:

"I am extremely grateful to our employees around the world for their dedication to our business in the face of Covid-19. Whilst there is significant ongoing uncertainty around the full impact of Covid-19 we are taking steps to manage our costs and cash flow. We have a high quality, resilient and diverse business portfolio; a strong balance sheet and good access to liquidity, and are further strengthening our financial position.

"Looking beyond the current environment, given our leading market positions, strong technology offering, and operational and investment discipline, we remain confident in our medium-term strategy."

ii round-up:

Car and truck emissions filter maker Johnson Matthey (LSE:JMAT) today reported a £50 million financial hit as automotive customers temporarily closed manufacturing plants.

German mammoth Volkswagen (EURONEXT:VWA) recently announced European plant suspensions to production as Covid-19 hit, while US rival Ford Motor (NYSE:F) has halted its dividend payment in an effort to conserve cash as car buyers stay at home.

Employing over 14,000 people, JMAT now expects to deliver a full-year 2019 performance below current City forecasts.

The shares rose by more than 3% in early UK trading, having fallen by nearly 40% year-to-date. 

Johnson Matthey is temporarily closing its automotive clean air plants around the world, with the exception of China, which is ramping back up as the country begins to emerge from the Covid-19 pandemic.  

Its health-related businesses, including the manufacturing of medical device components, had remained resilient, despite some export border control issues. No mention of its New Markets division and battery materials interests was made. 

A high focus on costs and cash management across the company is now being made.

Further cost reduction actions are expected to be outlined at its end of May full-year results announcement.

ii view:

Johnson Matthey has built itself into a key global player in the clean air arena. One in every three new cars carries one of its emission control exhaust units. Increasing legislation to improve the environment appears to play into its hands, while its move into battery materials and high energy materials offers scope for growth. 

However, as seen across the airline and aerospace industry, the stay at home, travel light culture now needed to battle the corona crisis is impacting the automotive industry and all its component makers hard.  

For investors, a near-40% drop in the share price year-to-date attempts to price in current disruption. Business diversity, the reopening of operations in China and exposure to favourable long-term environmental trends offer positives. But the length of any Covid-19 disruption is unknown, with concerns regarding the speed of Johnson Matthey’s ability to reduce its September 2019 £1.49 billion of debt persisting.

Positives: 

• Strong position in the clean air market
• A cost saving and efficiency programme in progress 

Negatives:

• Temporary clean air plant closures due to Covid-19
• Volatility in precious metal prices can hinder performance

The average rating of stock market analysts:

Strong hold