ii view: Johnson Matthey ups focus on climate change solutions

Its shares have fallen by more than a third over the last six months. We assess prospects.

Health business disposal

Chief executive Robert MacLeod said:

"As the world transitions to more sustainable technologies, we are focusing our portfolio on the most attractive growth areas, specifically businesses driving growth from climate change solutions - circularity solutions, hydrogen technologies and decarbonisation of chemicals and fuels. The sale of Health is a further step towards simplifying our portfolio.

"While Health has good long-term prospects, near term trading has been challenging, and the business requires significant capital investment. Health operates in different markets from the rest of JM, and we believe Altaris is the best partner to drive its future value."

ii round-up:

Chemicals company Johnson Matthey (LSE:JMAT) today announced the sale of its health business to investment company Altaris Capital for £325 million.

The company will retain a 30% stake in the business from which it expects to realise significant additional future value. The sale comes as Johnson looks to focus its activities down into growth areas geared towards climate change solutions. The disposal is expected to complete in mid-2022, subject to regulatory approval. 

Johnson Matthey shares rose marginally in UK trading, having fallen by more than a third over the last six months. Its shares tumbled back in mid-November as investors expressed disappointment following the planned exit of its battery materials business. The required level of investment needed to make the battery business viable in an environment of increasing large-scale competition had become too much. 

The sale of its health business, which employs over 1,000 people and makes specialist ingredients for the pharmaceutical and biotech industries, also follows the previously confirmed sale of its advanced glass technologies division. 

The health business accounted for under 2% of sales over Johnson’s last full financial year. The sale is expected to give rise to an accounting loss of around £200 million.

In November, it reported a doubling in first half adjusted operating profit to £293 million as sales of its Clean Air or vehicle catalytic converter business rose by a fifth to just under £1.2 billion under a post pandemic recovery in auto production. 

ii view:

Johnson Matthey derives most of its sales from emissions catalysts to reduce fossil fuel air pollution. Other businesses within 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 just months ago seen as a growth driver. 

But this latest business sale gives management enhanced focus. Its hydrogen technologies are already generating sales, if relatively small, and the need to reduce harmful vehicle exhaust and industrial emissions isn’t going away anytime soon. A £200 million share buyback will begin in the new year and the shares currently offer an estimated future dividend yield of over 3.5%. For now, and while the shares have suffered on the removal of battery material prospects, a more focused climate change solutions business is emerging, with the shares arguably still worthy of ongoing long-term support. 

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