“The only constant in life is change”. That axiom, usually ascribed to the Ephesian philosopher, Heraclitus, is not only paradoxical in nature, but it forms the basis of what is often termed a “Management of Change” strategy for businesses. As the name suggests, it centres on the ability of companies to successfully react in response to an evolving marketplace, whether the challenge is linked to regulatory change, increased competition, technological developments, and/or changing demographics.
Many successful corporations, or at least those with the lengthiest of pedigrees, have repeatedly changed their business models over the course of decades. And these kinds of changes are now much in evidence as organisations have been forced to rejig their operations in response to tightening environmental legislation. Indeed, outside of wartime, it’s difficult to recall a period in which interventionist government policy has had such a profound impact on corporate policy.
Nowhere is this better illustrated than the automotive sector, the sixth largest industry globally by revenue, according to figures from IBISWorld. Despite well documented technological, supply chain, and infrastructure hurdles, it is being forced to respond to the mandated phasing-out of petrol, diesel, and hybrid sales. History shows that things rarely work out well when governments force the hand of private enterprise. And it appears increasingly obvious that the automotive market will be subject to varying degrees of disruption through to 2030 – and perhaps beyond.
Unless the UK and other advanced economies pursue load-shedding policies – not inconceivable given net-zero edicts – then the likelihood is that some of the targets for the electric vehicle (EV) transition will be watered down, most probably the timetable governing the proscription on hybrid vehicles. At any rate, the targets already in place are precipitating change across the various supply chains serving the industry.
One of the clearest examples of a mandated imperative to change is provided by Johnson Matthey (JMAT), a corporation that has been around in one form or another since 1817. The speciality chemicals and sustainable technologies group has rationalised its business model in recent times in response to the EV transition. But its market-leading position in the catalytic converter space has placed it in an unfavourable position, at least nominally. However, it's worth considering that even with the changes underway, the switch away from diesel-fuelled commercial vehicles is likely to become a drawn-out process simply due to technical constraints.
Trucks carry more than 70 per cent of overland freight in Europe. That means that economic growth across the continent is inextricably linked to road haulage. Although the electrification of ‘last-mile’ delivery services seems a viable proposition, especially given the roll-out of metropolitan air quality legislation, the same still can’t be said for heavy goods vehicles. Despite some recent progress, current battery technology comes up short in terms of range, price, and the impact of weight on both energy consumption, and payload – the last point is crucial where industry profitability is concerned.
These technical constraints should mean that Johnson Matthey’s Clean Air division, which accounts for around 60 per cent of group sales, may benefit from heavy duty diesel sales for longer than anticipated. Any row-back on the hybrid market would also lengthen horizons on the Clean Air front. Ironically, demand per vehicle for Johnson Matthey products is being driven by tighter emissions regulation governing internal combustion engines. And even if demand levels fall away significantly in its European markets, it is predicted that the roll-out of hybrid vehicles in China and the US will continue to support volumes, a point highlighted earlier this year by IC resources analyst Alex Hamer.
If these factors provide further breathing space – as it were – for the catalytic converter business, management is clearly intent on expanding the group’s sustainable technologies capabilities. To this end, management recently entered into an investment agreement with the Jiading District in Shanghai, China. Johnson Matthey is to develop a catalyst coated membrane (CCM) production facility as it continues to reinforce its position in the three major hydrogen markets of the US, Europe, and China. The Chinese expansion comes on top of two other strategic partnerships, and it highlights why Hydrogen Technologies (expected to hit breakeven in 2025/26) is the fastest growing corner of the business.
Admittedly, the group has struggled to enhance margins at its Clean Air business, although efficiency benefits are predicted to improve matters through to its September year-end. Broker Jefferies recently noted that another venerable institution, US conglomerate Standard Industries, has just doubled its stake in Johnson Matthey to 10.1 per cent, making it the group’s largest shareholder and triggering speculation over a possible bid. Jefferies gives a target price of 2,200p a share based on an amalgam of its discounted cashflow and sum-of-the-parts valuations, representing a 20 per cent discount to the current share price and an undemanding EV/Ebitda multiple of 6.6.
