ii view: Johnson Matthey forecasts a return to profit growth

Cash from its carbon reduction products is being invested in future technologies. Buy, sell or hold? 

Full-year results to 31 March

• Adjusted sales down 6% to £3.92 billion
• Adjusted operating profit down 6% to £504 million
• Net debt down 29% to £775 million
• Final dividend of 50p per share
• Total dividend for the year up 26% to 70p per share

Chief executive Robert MacLeod said:

“Following a challenging first half, we recovered strongly in the second half helped by a strong recovery in our end markets and higher precious metal prices. We are delivering our efficiency programme, tightly managing working capital and generating cash from our more established businesses which we are continuing to invest for growth, particularly in battery materials and hydrogen. 

“As the world aims to build back greener as we come out of the pandemic, our technologies have never been more relevant.”

ii round-up:

Maker of products to reduce air pollution Johnson Matthey (LSE:JMAT) today forecast a return to profit after the global pandemic disrupted car production, cutting sales of its automotive catalytic converters.

Profit for the year ahead is expected to grow by low to mid-teen digits given improving auto production volumes and tightening environmental legislation in Asia and follows a 6% fall in profit to £504 million in the year to 31 March 2021. 

Johnson Matthey shares fell by around 2% in UK trading having gained by more than 65% since pandemic-induced market lows back in March 2020. Shares for fellow auto components maker Melrose (LSE:MRO) have gained by more than 80% over the same time, while shares of Europe’s biggest car maker Volkswagen (XETRA:VOW) have more than doubled. 

First half sales for Johnson Matthey fell by 20% as many of its automotive customers halted or cut production in the initial pandemic lockdowns. But these then rose by 11% during the second half, as activity levels returned to pre-pandemic levels. 

Johnson Matthey’s Clean Air and Efficient Natural Resources divisions make emissions catalysts to reduce air pollution across fossil fuel vehicles and heavy industries. These sit alongside its other two divisions of New Markets and Health. 

New Markets is developing and already selling hydrogen fuel cells technologies, along with battery materials and the commercialisation of eLNO®, its ultra-high energy density cathode material. The health division makes pharmaceutical ingredients used in areas such as generic opioid addiction therapies and was recently placed under strategic review by management. 

The 200-year-old plus Johnson Matthey also underlined its commitment to achieving a net zero carbon status by 2040, as it aims to become a global leader in climate change solutions. 

A final dividend of 50p per share leaves the total payment for the year at 70p per share, up from last year’s 55.63p per share but still down from the 85.5p paid during the 2018/2019 financial year.  

ii view:

Most of Johnson Matthey’s sales come from emissions catalysts to reduce fossil fuel air pollution. During this latest year, its Clear Air and Efficient Natural Resources divisions generated around 85% of overall revenues. New Markets accounted for a further 9% and the now under-review health business the balance of 6%.

For investors, consumer moves towards fully electric vehicles offers a threat to its fossil fuel emission reduction products. An estimated price earnings ratio above the three-and-10-year averages suggests the shares are not obviously cheap. And the dividend is not yet back at previous levels. 

But Johnson is already helping its customers address essential transitions towards a sustainable future via clean transport, clean energy, and the decarbonisation of industry.

Fuel cells and hydrogen production technologies are generating sales, if relatively small. And 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 the likely transitioning in its products going forward, its shares look to remain worthy of investors’ long-term support.

Positives: 

• Strong position in the clean air market
• Net debt reduced

Negatives:

• Likely reduced demand for catalytic converters 
• Dividend payment previously rebased

The average rating of stock market analysts:

Hold