Johnson Matthey expects bright hydrogen future

Johnson Matthey (JMAT) saw margins recover in the second half alongside the auto industry’s rebound, although this was not enough for underlying profits to climb in the 12 months to 31 March. 

That second-half performance allowed the company to beat expectations for its full-year numbers even with the impact of lower platinum group metal (PGM) prices and higher costs. The company makes car exhaust systems, and is a specialist at PGM recycling and refining. It also has a growing hydrogen division.

The car industry moved on from supply chain constraints in the second half of Johnson Matthey’s financial year, although chief executive Liam Condon noted alongside the 2023 results that further growth would be “limited” in the current financial year. “Margin expansion should mainly be driven by efficiency benefits [in the Clean Air division],” he added. 

This division, which sells catalytic converters, reported a 28 per cent dip in operating profit, to £230mn, in the year. The margin fell from 12.3 per cent the year before to 8.7 per cent. The fall came from “cost inflation, product mix, lower volumes”, although the company said raising prices had boosted returns in the second half.

Stripped out of the underlying figure was a £25mn payment to a customer “relating to failures in certain engine systems” for which Johnson Matthey supplied a coated substrate, with no admission of fault. 

Overall, the company’s prospects in the car industry look to have brightened as the demand for hybrid and non-electric cars stays stronger than was forecast a few years ago, but it is also expanding into other areas.

The key growth area is the hydrogen business unit. The company said alongside its 2023 results that this business was likely to lose money up to the 2026 financial year, and could hit sales of £200mn by the end of the previous year. The strategy here is not to develop a new dominant technology (as was the failed approach in electric vehicle batteries), but to supply innovative companies with existing technologies. 

The latest agreement is with Norwegian hydrogen company Hystar, which Johnson Matthey will provide with components to assemble electrolysers. Hydrogen sales were £55mn in the year, up from £25mn in the previous period, with an operating loss of £46mn. 

This new, slimmer Johnson Matthey is still reliant on the car industry to do well. But the approach is working if City forecasts are to be believed – operating margins will recover slowly over the next few years and the hydrogen business should deliver outside growth. Buy. 

Last IC View: Buy, 1,907p, 4 May 2023