Johnson Matthey ups guidance despite PGM price falls

In September we mused as to whether Johnson Matthey (JMAT) might now be seen as a potential takeover target. Well, any potential suitor will have noted that the 27 per cent fall in the share price over the past 12 months has left the speciality chemicals and sustainable technologies group trading at a modest 14 per cent premium to net assets.

The takeover speculation has been partly predicated on a significant increase in the holding of US conglomerate Standard Industries. But any offeror will know that Johnson Matthey’s financial performance will be governed to a large extent by the pace of change of the electric vehicle transition – hardly surprising, given its market-leading position in the production of catalytic converters and pollution filters for automobiles.

The group has been rationalising its product offering in the face of the transition and although it posted a 15 per cent fall in underlying operating profit for its September half-year — largely due to unfavourable precious metals pricing — it has nonetheless raised its full-year profit outlook on the back of successful cost-cutting measures and strengthening demand for its energy-focused units. To this end, management anticipates that the group’s medical device components and e-bike battery businesses will go on sale within the next few months. Around £70mn in planned cost savings have been achieved to date, and the group is on track to deliver at least £150mn annualised savings by the end of 2024/25. Cumulative capital expenditure over the next three years has also been pared back.

With efficiencies to the fore, management is now guiding high single-digit growth in operating performance, against the previous forecast for at least mid-single digit growth, assuming constant precious metal prices and currencies.

It is difficult to assess whether the wider energy transition presents as many opportunities as it does challenges, but it could be telling that the group’s hydrogen technologies unit, which supplies components for fuel cells and electrolysers, saw a 61 per cent jump in sales through the period. Catalyst technologies benefitted from higher average prices and an improved performance in China.

Though reports have emerged of increased central bank purchases, it would be folly to predict how precious metal prices will play out for the remainder of the financial year, and the group should forget any prospective boost from auto production given concerns over a global economic slowdown. The shares now change hands at just nine times forecast earnings, but given the promise afforded by its energy-focused units, it is not difficult to appreciate why some have speculated that the shares might be in play. Buy.

Last IC view: Buy, 1,839p, 25 May 2023