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Emissions regulation lifts Johnson Matthey

The maker of emission control systems, catalysts and fine chemicals continued to struggle with low commodity prices. But robust demand for catalytic converters and a cost-cutting programme sent the shares up 3 per cent.
June 2, 2016

Tighter regulation on European vehicle emissions in the wake of the Volkswagen scandal provided one of the only positive beats in what was otherwise a challenging financial year at Johnson Matthey (JMAT). Management responded to the longer than expected commodity price rout by implementing a costly restructuring programme designed to revitalise the group's struggling oil and gas and platinum-exposed businesses. Strip out £141m of associated one-off charges, and pre-tax profit declined by a relatively modest 5 per cent to £418m, which was enough to beat the market consensus estimate and send the shares up 3 per cent.

IC TIP: Hold at 2866p

Some of the mooted £34m of annual cost savings will be generated in the process technologies arm where challenges persist. Selling catalysts to oil and gas companies paralysed by the plummeting value of Brent Crude sparked a 31 per cent drop in divisional underlying operating profit. Management addressed these ongoing difficulties by writing down some of the group's more vulnerable natural gas and upstream assets.

While those measures are expected to provide a much-needed lift, management was less optimistic about prospects for the struggling precious metals unit. Despite cutting the cost base, divisional underlying operating profit slid 35 per cent to £66m as platinum prices declined by about a quarter. Last year's disposal of the division's gold and silver refining operation created a gap in income. And with trading conditions showing little sign of easing, an even weaker performance is anticipated in the year ahead.

Fortunately, the thriving emissions control technologies arm is expected to compensate for this shortfall. Demand for devices that limit pollutants in car exhaust systems rocketed after a raft of industry scandals pushed EU lawmakers into enforcing stricter rules on diesel vehicles. This latest wave of legislation triggered a 7 per cent rise in divisional revenue and a 15 per cent hike in underlying operating profit to £272m. The benefits of the regulatory reforms, coupled with growing vehicle production growth in Asia and North America, are predicted to continue filtering through into 2017 and beyond.

Prior to these results, broker Liberum expected adjusted pre-tax profit of £435m in the year to 31 March 2017, giving EPS of 185p (from £415m and 173p in FY2016).

 

JOHNSON MATTHEY (JMAT)
ORD PRICE:2,866pMARKET VALUE:£5.5bn
TOUCH:2,865-2,867p12-MONTH HIGH:3,546pLOW: 2,208p
DIVIDEND YIELD:2.5%PE RATIO:17
NET ASSET VALUE:958p*NET DEBT:37%

Year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201212.040914955.0
201310.734913257.0
201411.240716863.0
201510.149621168.0
2016†10.738616671.5
% change+7-22-21+5

Ex-div: 9 Jun

Payment: 2 Aug

Includes intangible assets of £795m, or 411p a share

†Excludes special dividend of 150p a share, paid in February 2016