ii view: Johnson Matthey punished for metals price hike

A jump in precious metal prices pushed debt higher, but a better second-half is expected. 

Half-year results to 30 September 2019

• Revenue up 37% to £6.82 billion
• Sales excluding precious metals up 3% on constant currency basis to £2.12 billion
• Pre-tax profit down 8% to £225 million
• Adjusted Earnings Per Share (EPS) down 12% to 95.8p
• Net debt up 43% to £1.5 billion
• Interim dividend up 5% to 24.50p per share

Chief executive Robert MacLeod said:

“We continue to execute well against our strategy and delivered first half operating performance in line with expectations. I was pleased with the continued good sales growth, demonstrating our broad based growth drivers, although operating profit was slightly down as a result of one-off costs associated with manufacturing inefficiencies in Clean Air in the first half.  

“We expect to deliver a stronger second half, primarily driven by the absence of the one-off costs and seasonality in Efficient Natural Resources. For the full year, we expect to deliver group operating performance in line with market expectations.

“Given our clear strategy, the strong foundations we have put in place and the ongoing investment into the business for the longer term, we remain confident about the future growth prospects across all of our sectors.”

ii round-up:

Car and truck emissions filter maker Johnson Matthey (LSE:JMAT) reported disappointing half-year results, impacted by higher precious metal prices used in its filters. 

Increases in excess of 50% for both average palladium and rhodium prices drove a 43% or £452 million increase in group net debt, raising finance costs and dragging adjusted earning per share below analysts’ forecasts. 

The share price fell by over 6% in mid-morning UK stock market trading. 

Adjusted operating profit for its Clean Air division fell by 6% to £179 million, although it rose by 9% and 25% for both its Efficient Natural Resources and Health divisions respectively. 

Costs in relation to its new Polish manufacturing plant hindered its Clean Air division, although hikes in precious metal prices boosted the Efficient Natural Resources business, while operational improvements aided its relatively small divisional Health business. 

Battery Materials and the commercialisation of eLNO®, its ultra-high energy density cathode material remained the focus for its loss-making year-to-date New Markets division. 

Accompanying management outlook comments pointed to an expected stronger second half aided by the absence of one-off costs and seasonality in Catalyst Technologies. 

ii view:

Johnson Matthey has built itself into a key global player in the clean air arena. One in every three new cars carries one of its emission control exhaust units. Increasing legislation to improve the environment plays into its hands, while a move into battery materials and high energy materials offers scope for growth. 

For investors, one eye will be on current difficulties reported across the global automobile industry. A forward price/earnings ratio of around 14 and below the 10-year average of nearer 17 potentially offers some compensation. A prospective dividend yield of over 2.5%, while not enough on its own to attract attention, does at least reward patient, longer term investors. 

Positives: 

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

Negatives:

• Clean air light duty American sales fell 7% hit by weaker diesel sales
• Volatility in precious metal prices can hinder performance

The average rating of stock market analysts:

Strong hold