ii view: Johnson Matthey in demand after unit sale and share buyback

Sale of Medical Device Components business

Chief executive Liam Condon said: 

“As a Johnson Matthey business, Medical Device Components (MDC) has delivered technological differentiation and good growth to the critical health sector. We welcome Montagu's plans to continue the investment and growth plans at MDC."

• Invest with ii: Open a Stocks & Shares ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA

ii round-up:

Johnson Matthey (LSE:JMAT), a manufacturer of products to reduce harmful emissions, today completed its journey to refocus the business portfolio, with the sale of its medical devices component maker. 

The division, with factories in the US, Mexico, and Australia, is to be sold to Montagu Private Equity for $700 million (£553 million), with $250 million of the sale proceeds to be returned to shareholders via share buybacks. 

Shares in the FTSE 250 company rose by 8% in UK trading having come into this latest news down around 12% over the last year. That’s similar to European car giant Volkswagen AG (XETRA:VOW) and in contrast to a 5% gain for the FTSE 250 index itself. 

Johnson Matthey’s drive to refocus its businesses began in May 2022, with the total value of businesses sold now significantly more than management’s original target of £300 million.

Aside from the $250 million buyback, and subject to regulatory approval, the balance of the £553 million proceeds will be used to repay some of Johnson’s existing debt as well as for other general corporate purposes. 

Other businesses previously sold include its former Battery Materials division, which it exited given the level of investment required to make the business viable in an environment of increasing competition. 

Full-year results to the end of March are scheduled to be announced on 23 May. 

ii view:

The now refocused Johnson Matthey is made up of four divisions. Its Platinum Group Metals (PGM) business, which accounts for around half of all sales, is the world's largest recycler of such metals, supplying both its own businesses and others zwith metal products from areas such as vehicle scrappage. 

Platinum is used by its Clean Air division to make catalytic converters fitted to exhaust systems to reduce pollution. It accounts for a further two-fifths or so of sales. Remaining sales are split between its Catalyst Technologies division providing industry such as oil and chemical companies with emissions reducing systems, and its Hydrogen Technologies unit offering components for fuel cells and electrolysers.   

For investors, the volatility of PGM metal prices and its impact on profits cannot be ignored. The move towards electric vehicles is reducing the need for its clean air vehicle exhaust products. Costs generally for businesses remain elevated, while its hydrogen business is still small in terms of overall group sales and likely to remain loss making until 2025/2026. 

• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• ISA ideas: funds and trusts for young, middle-aged and retired investors
• 12 UK stocks make this list of buy ideas

More favourably, planned business sales are now complete, raising more than originally hoped for. Cost saving initiatives are reaping rewards, with management on track to deliver more than £150 million of annualised cost savings by the end of 2024/25. Catalyst Technology related sales and profits rose during the first half of this current financial year to late September, while sales for the hydrogen business also improved. 

For now, and despite ongoing risks, the new streamlined business with a forecast dividend yield of around 4.5%, now supplemented with share buybacks, is paying existing shareholders to stay patient and making new investors take notice. 

Positives: 

• Hydrogen technology opportunities 
• Targeting cost cuts

Negatives:

• Likely reduced demand for catalytic converters 
• Subject to currency headwinds

The average rating of stock market analysts:

Strong hold