Horse-drawn carts were the biggest polluters on the roads when Johnson Matthey started as a gold assayer nearly 200 years ago. These days, it's the motor car and catalytic converters are the group's bread and butter and, given the legislative drive towards cleaner air, Matthey's future looks assured, too.
- Strong full-year results
- Clear structural growth drivers
- Defensive fine chemicals business
- Paying a special dividend
- Unpredictable European car market
- Weak platinum price
After developing the first catalysts to combat exhaust fumes almost 40 years ago, the group now makes more catalytic converters than anyone else. And the market is growing fast - last year, sales of heavy duty diesel (HDD) catalysts fitted to trucks and buses grew by half to £438m and underlying operating profit more than doubled.
Truck production in North America, where hauliers are replacing old fleets, also delivered big returns. Almost £300m of HDD catalysts were sold there last year, up 52 per cent, and even in Europe sales grew over a quarter. Matthey reckons that by 2015 the HDD catalysts market will have almost tripled to $2.5bn (£1.6bn) and management expects to win at least 60 per cent of that.
Western European car manufacturers are making more fuel-efficient diesel vehicles, too - about 55 per cent of the total. Diesels are worth five times as much to Matthey than their petrol equivalents, and global sales of the light-duty catalysts they use grew 10 per cent to £969m. Sales to Asia also stand out - they grew a fifth after Japan bounced back from the tsunami - and Europe, Matthey's biggest market, turned over £588m; an 8 per cent increase.
True, economic difficulties mean Matthey's European car operations will struggle to outdo motor production this year, and there's not much fresh emissions legislation due, either. Moreover, order visibility is limited to just a couple of months. Still, things start getting really exciting next year when new trucks will need additional filters to meet tighter nitrogen oxide emission standards, which will treble the value per truck to Matthey and bring in more cash per car. Legislation for tackling non-road vehicles for mining and agriculture will crank up in the US and Europe next year as well, and in China, India and Brazil from 2014.
JOHNSON MATTHEY (JMAT) | ||||
|---|---|---|---|---|
| ORD PRICE: | 2,267p | MARKET VALUE: | £4.9bn | |
| TOUCH: | 2,265-2,269p | 12-MONTH HIGH/LOW: | 2,426p | 1,484p |
| DIVIDEND YIELD: | 2.6% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 713p | NET DEBT: | 30% | |
| Year to 31 Mar | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 7.85 | 249 | 82.0 | 37.1 |
| 2010 | 7.84 | 229 | 77.6 | 39.0 |
| 2011 | 9.98 | 259 | 85.2 | 46.0 |
| 2012 | 12.0 | 409 | 149 | 55.0† |
| 2013* | 12.4 | 412 | 150 | 60.0 |
| % change | +3 | +1 | +1 | +9 |
*JPMorgan Cazenove forecasts Normal market size:1,100 Matched bargain trading Beta:1.39 †Excludes 100p special dividend | ||||
The high-margin precious metals division generates over 21 per cent of group sales, too, but 42 per cent of profit. Admittedly, a sharp second-half decline in metal prices clipped demand for services such as refining and this year will depend heavily on which way commodity prices go.
Still, lower prices means less working capital is needed to buy the platinum, palladium and rhodium that its catalytic converters use to oxidise carbon monoxide and hydrocarbons. It's a business that throws off plenty of cash, too. So much, in fact, that Matthey is paying a 100p special dividend, and you've got until 31 July to buy the shares and qualify for it.
That said, it's not as if management can't think of a better use for its cash - an extra £80m of capital expenditure is planned this year and the group will invest £11m more in vital research and development. Its also clever with its cash. Return on invested capital finally smashed through the group's long-term goal of 20 per cent, and reached 22.3 per cent - far exceeding the pre-tax cost of capital.
Matthey also boasts a thriving fine chemicals business - Macfarlan Smith - tucked away in Edinburgh, which is proving to be a reliable and non-cyclical growth story. Making opiates for painkillers and active pharmaceutical ingredients such as amphetamines for generic versions of drugs, including Shire's hyperactivity treatment Adderall XR, made the division £70m last year - up 24 per cent.
