Shares in Johnson Matthey (JMAT) tumbled to their lowest point in more than two years at the end of last month over concerns that the auto catalyst maker would suffer in the wake of the Volkswagen emissions scandal. Sales of diesel catalytic converters were the key driver of growth in the group's core emissions control technologies (ECT) division last year.
Johnson Matthey's ECT unit sells catalytic converters to manufacturers of both diesel and petrol-powered vehicles. The devices sit in the exhaust system of the vehicle and convert pollutants - carbon monoxide, hydrocarbons and oxides of nitrogen (NOx) - into carbon dioxide, water and nitrogen.
Strong sales of diesel car catalysts in Europe drove the division's underlying operating profit up 16 per cent to £237m during the year to 31 March 2015. From September 2014 new models of diesel car had to adhere to European legislation for tighter controls on NOx emissions, and the rules extended to all diesel cars produced in the EU last month. Because they require additional catalyst technology, the changes increase the sales value per vehicle for Johnson Matthey by around 20 per cent.
Investors had also hoped that diesel would gain popularity in the US, where the fuel currently accounts for just 5 per cent of car sales. In June management noted "some early indications of increasing light duty diesel penetration". However, the accusations levelled at Volkswagen seem likely to undermine these prospects.
Deutsche Bank says...
Buy. We estimate that, of the £1.98bn of sales in the catalyst business this year, £644m will be from light duty diesel. If we were to assume all of this business is lost due to the current concerns around diesel (an unlikely event in our view) and not offset by additional gasoline sales, we estimate that Matthey would lose £97m of operating profit - equivalent to 20 per cent of the group total, with a similar knock-on impact on EPS. If we were to take a more extreme view and strip out heavy-duty diesel as well, this would remove another 26 per cent of group EPS (although the lack of alternatives to diesel in heavy duty makes this a very unlikely scenario). Our base case remains for EPS of 186p for FY2016.
Jefferies says...
Buy. This is a high-profile scandal that may yet develop further. How the bad publicity affects consumers' future vehicle choice has to be a major concern from a Johnson Matthey perspective, since the value of a diesel light duty vehicle system to the group is around five times that of a gasoline system. We consider the extreme case that diesel falls from around 50 per cent of new passenger car sales in Europe today to zero, and believe the group could lose some £55m of operating profit. That would cut EPS by around 12 per cent from our current FY2017 forecast of 189p.
