ii view: green play Johnson Matthey's profits impress

This chemicals specialist is building both its battery materials and hydrogen technologies. We assess prospects. 

Full-year trading update to 31 March

Chief executive Robert MacLeod said:

“In the year, we continued to execute our growth strategy at pace. We are driving cashflow from our more established businesses to invest in our suite of exciting sustainable technologies that will enable decarbonisation and enhance circularity, including our portfolio of eLNO battery materials and hydrogen technologies. 

“We have commenced a strategic review of Health, as we continue to focus resources to maximise value for our shareholders. As the world builds back greener following the pandemic, we have an important role to play in helping society address climate change through our sustainable technologies, and we remain focused on commercialising these and delivering our growth ambitions.”

ii round-up:

Maker of products to reduce air pollution Johnson Matthey (LSE:JMAT) today outlined its expectation for full-year profit to come in at the upper end of City forecasts, as it also launched a strategic review of its health business.

Second-half performance for the automotive catalytic converters firm had proved materially stronger, as its car making customers overcome early year pandemic related disruption and as it tightened its own focus on cost control.

Analysts’ forecasts for operating profit for the year to the end of March range between £405 million to £502 million compared to last year’s £539 million. 

Johnson Matthey shares rose by more than 5% in UK trading, bringing their year-to-date gain to more than 30%. Shares for electric car maker Tesla (NASDAQ:TSLA) are down by around 5% during 2021, having risen by over 700% during 2020. Shares for German giant Volkswagen (XETRA:VOW) are up by more than 50% year-to-date as it continues to ramp-up its electric vehicle production.

Demand from Asian auto customers had proved the strongest, led by China and aided by its government stimulus programme. For Europe and the Americas, demand has improved steadily from the pandemic hit first quarter. 

Cost savings of £60 million are expected to have been achieved for the financial year just ended, with annualised savings of £225 million in management’s sights come 2022/23. Group net debt of under £850 million is currently outstanding, leaving its net debt to adjusted profit (EBITDA) ratio below its target range of between 1.5 to 2.0 times.

Full-year results are scheduled for 27 May. 

ii view:

Much of Johnson Matthey’s current profit comes from emissions catalysts to reduce fossil fuel air pollution. Its products cater for both the car and truck sectors along with heavy industries such as chemicals and oil and gas. Around one in every three new cars carries one of its emission control exhaust units. JMAT also has footholds in both the hydrogen fuel cell and battery materials arenas. It has over 20 years’ experience in fuels cells with sales expected to be up over 20% during the 2020 financial year. The construction of its first commercial battery materials plant remains on schedule. 

Its health business makes pharmaceutical ingredients used in areas such as generic opioid addiction therapies. During 2019, its contribution to profits was less than 5% of the overall group total. Despite a crossover with the company’s broader chemicals and materials specialist knowledge, the business is now undergoing a strategic review. 

For investors, consumer moves towards fully electric vehicles offer a threat to its fossil fuel emission reduction products. A previous cut or rebasing of the dividend payment also offers some disappoint, while an estimated price/earnings ratio above the three-and-10-year averages suggests the shares are not obviously cheap. 

But exposure to required environmental change continues to support the long-term reasoning for investor interest in Johnson Matthey shares. Although relatively small, it already achieves sales of around £100 million annually across fuel cells and hydrogen production technologies. Its addressable market for the manufacture of catalyst coated membranes, used in fuel cell truck and automotive applications, is estimated by management consultants to be worth £1 billion per annum come 2030 and more than £10 billion per annum come 2040. For now, and despite risks given its transitioning in its products going forward, its shares appear to remain worthy of investors’ long-term support. 

Positives: 

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

Negatives:

• Likely reduced demand for catalytic converters 
• Dividend payment cut

The average rating of stock market analysts:

Strong hold