Metals bash Johnson Matthey

Johnson Matthey's catalysts and filters sold well in North America and Asia during the first quarter, and profits grew at its fine chemicals business, too. But a slump in precious metals prices and trouble in Europe is making life hard and could restrict growth this year.

Average platinum prices are down 16 per cent on last year and palladium a little more. That's hit demand for refining and other high-margin services at the precious metal products (PMP) division, which is why an 8 per cent drop in sales meant "significantly lower" operating profit. Still, group sales were up 6 per cent at £657m and underlying pre-tax profit nudged £100m, driven by the core environmental technologies unit. There, strong demand for both light and heavy duty (HDD) vehicle catalysts in North America made up for weakness in Europe, steering revenue up 12 per cent to £465m. Yes, visibility is limited to just a couple of months, but demand there and in the Far East is steady. Barring a further fall in metal prices or a market crash, the second quarter should be very similar to the first. It's looking that way for the full year, too, with PMP snuffing out progress elsewhere.

Deutsche Bank says…

Buy. Visibility remains low due to macro uncertainties, but overall demand remains steady as growth in North America and Asia is offsetting European weakness. Deutsche Bank is currently looking at 2.5 per cent growth year on year in underlying pre-tax profit to £436.6m. After 1.7 per cent growth in the first quarter, and with comparisons easier in the second half because precious metal products started to weaken late last year, we only see modest downside risk to consensus estimates. At 13.5 times forward earnings we see the strong track record of growth, particularly within HDD, and the long-term structural drivers as under-appreciated.

JPMorgan Cazenove says…

Overweight. Johnson Matthey is navigating a delicate balance between cautious optimism for the year and the impact of weaker precious metals prices and negative foreign exchange. To reflect that, we lower our forecast for adjusted pre-tax profit in 2013 from £428m to £411m, giving an EPS cut of 2 per cent to 153.7p. That affects our target price, which drops by 100p to 2,580p. Precious metal products is the division that could prove the swing for the year overall, given the operational leverage if activity declines and if the volatility in PGM prices continues, especially the key platinum price.