- Division once held up as big future focus to be sold off
- CEO Robert MacLeod to leave in February after eight years in charge
Developing a whole new core business is tough. Too tough for Johnson Matthey (JMAT), it turns out. The company has announced it will sell its battery materials division, into which it has poured hundreds of millions of pounds, after coming to the conclusion it could not deliver an adequate return on investment.
Shares in the catalytic converter specialist tumbled 18 per cent on the news.
JM’s earnings largely come from its catalytic converter business, which has taken a hit from the car industry’s supply chain issues this year. This is also unlikely to be a long-term driver of earnings, given the shift to electric vehicles. The company also has a hydrogen fuel cell business, which it described as a "more attractive growth area".
Amid the volte-face, JM announced chief executive Robert MacLeod will step down in February after around eight years in charge, with Liam Condon coming in from chemicals giant Bayer as a replacement. The company said its 2022 earnings would be towards the “lower end of market expectations” largely because of the auto industry's supply chain difficulties.
JM has spent years working on eLNO cathode technology, which it said gave batteries better energy density than the standard cathode used in nickel-manganese-cobalt (NMC) lithium-ion power units.
The battery exit comes just a few months after the company said it would build a second plant in Europe. JM started construction on a £550m plant in Poland last year, and it was expected to reach commercial production in 2024. The company pegs the division's net asset value at £340m, although Jefferies analyst Charlie Bentley said the sale price would likely be a "fraction" of this.
It's not hard to see why. Thursday’s announcement also revealed JM had been looking for a partner to keep the division going, but the search made it “clear” the capital intensity needed was too high to compete with “large-scale, low-cost producers”.
“While the testing of our eLNO battery materials with customers is going well, the marketplace is rapidly evolving with increasing commoditisation and lower returns,” said MacLeod. “We have concluded that we will not achieve the returns necessary to justify further investment.”
This is not the first time the company has pulled the plug on a battery strategy. In 2020, it took a £57m write-down on its lithium iron phosphate (LFP) battery cathode technology, closing down the segment after “sales fell short of expectations”.
Bentley said JM was facing difficult long-term questions after this withdrawal.
"While hydrogen and chemical [decarbonisation] should grow, it is very hard to believe these can be sufficient revenue drivers and replace the very significant earnings from Clean Air [the catalytic converter division]," he said. Clean Air represents just under half of JM's operating profit.
This is a major shift in strategy that has seen the company throw out years of work and hundreds of millions of pounds in investment. While this hard-eyed approach could save shareholders cash down the track it opens up broader questions around what has changed in such a short time and why was this not flagged previously. Move to hold.
Last IC View: Buy, 2,245p, 26 Nov 2020
