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Johnson Matthey takes a knock

Johnson Matthey has a great future, but short-term headwinds temper our enthusiasm
February 7, 2013

Whats new:

■ Lower third-quarter profits

■ Further weakness in European autos

■ Uncertainty over Anglo Platinum deal

IC TIP: Hold at 2292p

Johnson Matthey's (JMAT) shares have underperformed the wider market recently, mostly on concerns about European car production and uncertainty surrounding contract negotiations with Anglo Platinum (Amplats). Yet, despite a poor third quarter, management still thinks the second half will be no worse than the first.

Sales fell 2 per cent to £635m in the final three months of 2012 and underlying pre-tax profits tumbled 19 per cent to £84.3m. Much of that was down to lower sales of lucrative diesel catalytic converters in Europe, which trimmed revenue from emission control technologies by 6 per cent to £346m. Sales of heavy duty diesel (HDD) catalysts were flat at £108m, although demand for its chemical production catalysts is rising. Elsewhere, Matthey did less business with Amplats for services like bespoke market research and industry reports, and it’s this work, part of the Precious Metal Products (PMP) division, that’s causing further doubts. Costs there are fixed, so a £10m drop in sales came straight off the bottom line - easily offsetting slightly higher platinum group metal (PGM) prices. However, an increase in refining volumes should benefit the fourth quarter, and it’s thought talks with Amplats could end soon.

 

Deutsche Bank says…

Buy. We forecast second half pre-tax profit that's 3 per cent above the first half with consensus slightly lower at plus 2 per cent. Following the third-quarter performance we are forecasting a 9 per cent drop in full-year underlying pre-tax profit to £389m, giving underlying EPS of 148.4p. In the short term, underlying structural growth is being masked by challenging end markets and lower PGM volumes, but we note the long-term growth drivers remain intact supported by legislation and further penetration of HDD. The stock continues to offer value, rated at 14 times 2014's EPS forecasts, so retain our buy recommendation and 2,700p target price.

 

Bank of America Merrill Lynch says…

Neutral. Maintaining full-year guidance requires a significant sequential improvement in fourth quarter profit of about 25 per cent. But this should be achievable given normal seasonality, an absence of production problems in US gold and silver refining, and a tick-up in precious metal services operating profit due to improved pricing in PGM markets. Any impact from Anglo's platinum strategy review is unlikely to occur until 2014, with a 2 per cent EPS cut followed by an 8 per cent cut in 2015 looking possible. A post Anglo PE ratio of 15 for 2014 looks fair given truck emission opportunities.