ii view: green play Johnson Matthey needs a catalyst

This catalytic converter maker has new management and harbours hydrogen fell cell ambitions. We assess prospects. 

First-half results to 30 September

• Revenue down 14% to £7.38 billion
• Adjusted profit down 30% to £222 million
• Interim dividend unchanged at 22p per share
• Net debt up 12% from March to £963 million

Guidance:

• Now expects full-year adjusted operating profit to be between £458 million and £516 million

Chief executive Liam Condon said: 

“Over the past six months, there have been further positive developments in the transition to net zero. Legislation such as the Inflation Reduction Act in the US, as well as the urgent need for sources of clean energy in Europe, are driving demand for sustainable technology solutions. We are in a strong position to benefit and enable our customers to decarbonise and meet their net zero goals.”

ii round-up:

Clean air focused Johnson Matthey (LSE:JMAT) today reported a fall in first half profit as it battled ongoing supply chain challenges and a lag in recovering higher costs such as energy.  

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Adjusted operating profit for the six months to the end of September fell by almost a third to £222 million, broadly in line with City forecasts. 

Johnson Matthey shares moved between marginal gains and losses in UK trading having come into this latest announcement little changed year-to-date. Shares for fellow automotive components maker Melrose Industries (LSE:MRO) are down by close to a fifth during 2022, similar to both major European manufacturer Volkswagen AG (XETRA:VOW) and the fall in the FTSE All World index. 

Johnson, whose sales largely come from emissions catalysts to reduce air pollution, has been slimming down its portfolio of businesses including previously selling both its Health and Battery Materials businesses. 

Adjusted profit for its biggest division Clean Air, which recently won a contract to supply Mercedes-Benz Group AG (XETRA:MBG) light duty diesel vehicles, fell by just under a third. Losses for its Hydrogen division, supplying fuel cell components, doubled to £24 million.  

The FTSE 250 company expects full-year adjusted operating profit to meet current City forecasts of between £458 million and £516 million, although that’s down from management’s own previous forecast of £491 million to £641 million.  

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Around three-fifths of management are now either new external hires, including its relatively new CEO from chemicals group Bayer AG (XETRA:BAYN), or new internal appointments.

Full-year results to the end of March are scheduled for 26 May. 

ii view:

Started in 1817, Johnson Matthey is today pursuing a broad strategy to businesses including automotive, chemicals and energy to transition to net zero carbon under climate change requirements. Its Clean Air business makes products for automotive catalytic converters, while its PGM Services business processes metals and chemicals used in a range of clean air products including those for catalytic converters. Its hydrogen technologies business aims to be the market leader in high value performance components for fuel cells. 

For investors, rising costs including those for energy and continued supply chain challenges cannot be overlooked. Consumer moves towards fully electric vehicles is a threat to its fossil fuel emission reduction products, while its previous exit from battery materials removed what was previously seen as a growth driver.

More favourably, new management are attempting to inject renewed vigour back into the company. The need to reduce harmful vehicle exhaust and industrial emissions isn’t going away anytime soon, while a price-to-net asset value below the three-year average suggests the shares are not obviously expensive.  

On balance, and while some caution looks sensible, a forecast dividend yield of more than 3.5% is arguably paying investors to stay patient. 

Positives: 

• Hydrogen technology opportunities 
• Targeting cost cuts

Negatives:

• Likely reduced demand for catalytic converters 
• Exited a previously perceived growth business

The average rating of stock market analysts:

Hold