Interactive Investor

ii view: Johnson Matthey lowers profit guidance

26th May 2022 11:40

Keith Bowman from interactive investor

Auto production remains disrupted, but this catalytic converter maker has a new CEO. We assess prospects.  

Full-year results to 31 March

  • Revenue up 4% to £16 billion
  • Pre-tax profit down 13% to £195 million
  • Net debt up 10% to £856 million
  • Final dividend of 55p per share
  • Total dividend for the year up 10% to 77p per share

Guidance:

  • Now expects underlying operating profit in the lower half of a range of £491 million to £641 million

Chairman Patrick Thomas said:

“This has been a very challenging year for Johnson Matthey and our shareholders. We took important and necessary strategic decisions with the business portfolio, with the exit from Battery Materials and divestment of Health.

“We fully endorse the strategy Liam Condon (new chief executive) has proposed and look forward to supporting him in executing this to restore and drive value creation for shareholders.”

ii round-up:

Clean air focused Johnson Matthey (LSE:JMAT) today guided profit forecasts for the year ahead to the lower end of City estimates as its customers battled disruption from both the ongoing pandemic in China and the war in Ukraine.  

The new chief executive also detailed strategic pushes including annual cost savings of £150 million as pre-tax profit for the year to the end of March fell 13% to £195 million.

Johnson Matthey shares fell by around 6% in UK trading, having risen by almost 15% year-to-date coming into these latest results. Shares for electric vehicle maker Tesla (NASDAQ:TSLA) have fallen by 37% during 2022 as it battled Covid related closures for its Chinese manufacturing plant. Shares for General Motors (NYSE:GM) are down by a similar amount. The FTSE All World index has fallen by 16% year-to-date. 

JMAT, 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. 

Under its new strategy, the FTSE 250 company will focus on its remaining four businesses helping the automotive, chemical and energy industries to transition to net zero carbon under climate change requirements. 

Around three-fifths of the management team are either new external hires, including its chief executive previously at chemical company Bayer, or new internal appointments.

Accompanying outlook comment highlighted the group’s continued close correlation to levels of auto production and precious metal prices used to make both auto and industrial scale catalytic converters.  

Johnson’s Annual General Meeting (AGM) is scheduled for 21 July. 

ii view:

Founded in 1817, Johnson Matthey today employs over 12,000 people across around 30 countries. Its Clean Air business makes products for automotive catalytic converters, while its Efficient Natural Resources business processes metals and chemicals used in a range of clean air products including those for catalytic converters. Other businesses under its New Markets division include its hydrogen technologies unit and its diagnostic services unit for the oil and gas industry. 

For investors, disruption to its automotive customers caused by both China and Ukraine cannot be ignored. Rising costs for industry generally remain of consideration, while consumer moves towards fully electric vehicles is a threat to the company's fossil fuel emission reduction products. Its exit from the battery materials business also removes what was previously seen as a growth driver. 

On the upside, the need to reduce harmful vehicle exhaust and industrial emissions isn’t going away anytime soon. The new management team should inject renewed vigour into its strategy, while a historic and future forecast dividend yield of over 3% is not totally derisory in an environment of low if rising interest rates. For now, and balancing renewed management and strategy against a still challenging outlook, investors will likely require continued patience. 

Positives: 

  • Hydrogen technology opportunities 
  • Targeting cost cuts

Negatives:

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

The average rating of stock market analysts:

Hold

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