ii view: Johnson Matthey has some convincing to do

Exiting battery technologies, targeting green hydrogen but a struggling share price. We assess prospects.

First-half to 30 September

• Revenue up 23% to £8.59 billion
• Adjusted sales excluding precious metals up 21% to £1.9 billion
• Adjusted operating profit up 102% to £293 million
• Interim dividend up 10% to 22p per share

Chief executive Robert MacLeod said:

“We delivered a resilient trading performance in what has been a challenging environment, given the supply chain volatility which has affected a number of our end markets.

“Looking forward, the changing world around us means that Johnson Matthey has never been more relevant. Our metal expertise and process technologies are critical to many new markets focused on climate change solutions and give us a strong competitive advantage. We have strong foundations in Clean Air and in Efficient Natural Resources and exciting opportunities to drive our future growth in circularity, hydrogen and decarbonisation. To ensure we are focusing our resources on these core growth opportunities we have taken some strategic decisions around our portfolio.”

ii round-up:

Today’s results follow Johnson Matthey's (LSE:JMAT) recent announcement regarding a planned exit from its battery materials business, a decision which investors are still digesting. 

Half-year sales rose 21% to £1.9 billion in the wake of a strong recovery in emissions technologies, with underlying or adjusted operating profit doubling to level above that achieved before the pandemic. 

Johnson Matthey shares drifted marginally lower in UK trading having fallen by over 20% since its earlier November announcement regarding its battery materials exit. A share price retreat which now threatens its future in the FTSE 100 index.

The required level of investment to make the battery business viable in an environment of increasing large-scale competition now sees the perceived growth business up for sale. 

The sale of its Advanced Glass Technologies division has also now been agreed with management confirming discussions regarding a potential sale of its previously under review Health division. The pharmaceutical ingredients business generates around 6% of sales. 

Sales for its Clean Air or vehicle exhaust business rose 19% to just under £1.2 billion, with sales for the industrial focused pollution reduction or Efficient Natural Resources division up 27% to £523 million. Adjusted profit for each more than doubled under the pandemic recovery helping bankroll a 10% increase in the interim dividend payment to 22p per share. 

A new £200 million share buyback programme will begin in the new year. 

As previously flagged, full-year trading remains overshadowed by supply chain shortages hitting the auto industry and the consequential impact on precious metals prices. 

ii view:

More than 200 years old, Johnson Matthey derives most of its sales from emissions catalysts to reduce fossil fuel air pollution. Other businesses in its New Markets division include its hydrogen technologies unit and the now to be exited battery materials business. The decision to exit battery materials also came with a planned new chief executive. Liam Condon will head the company from early March and is currently on the board at Bayer AG (XETRA:BAYN). 

For investors, consumer moves towards fully electric vehicles is a threat to Johnson’s fossil fuel emission reduction products. Its planned exit from the battery business removes what was only recently considered a growth driver, while the impact of the pandemic remains evident in trading and the previous downgrading of full year expectations.  

On the upside, its hydrogen technologies are already generating sales, if relatively small. The need to reduce harmful vehicle exhaust and industrial emissions isn’t going away anytime soon, and the shares sit on an estimated forward dividend yield of over 3%. Johnson Matthey, until recently considered a growth stock, has had its wings clipped and is in very real danger of losing its place in the FTSE 100 index. Climate change opportunity persists, but investors will require patience as they await the arrival of a new CEO.

Positives: 

• Hydrogen technology opportunities 
• Relatively attractive dividend payment

Negatives:

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

The average rating of stock market analysts:

Hold