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Johnson Matthey debt inflated by precious metal prices

The specialist in catalytic converters was hit by the global automotive slowdown
November 21, 2019

A significant £352m precious metal working capital outflow fuelled by high precious metals prices was largely responsible for pushing Johnson Matthey’s (JMAT) net-debt-to-cash-profits ratio beyond its target threshold. The specialty chemicals group’s half-year figures were also stung by difficulties at its new Polish plant, a slowdown in heavy duty diesel vehicles and its exposure to the mounting regulatory focus on the US opioid addiction therapy market.

IC TIP: Buy at 3,047p

Palladium and rhodium prices increased by 52 per cent and 58 per cent, respectively, during the period, which subsequently fed into Johnson Matthey’s production of catalytic converters and inflated its working capital. Chief financial officer Anna Manz last witnessed a similarly “fast and spiky” movement in precious metal prices 12 years ago. The group, which is the largest secondary platinum group metals refiner in the world, experienced a total free cash outflow of £382m, driven by an overall working capital outflow of £467m. 

At £1.5bn, Johnson Matthey’s net debt now sits at a multiple of 2.1 times cash profits, outside its target range of between 1.5 and 2, while its return on invested capital was also dragged down to 15 per cent from 16.7 per cent, well short of its 20 per cent target. 

The group did secure a 4 per cent rise in sales within its largest division, clean air, which includes the production of catalytic converters. Johnson Matthey’s light duty vehicle catalysts grew sales in Europe and Asia but fell in the Americas, driven by weaker diesel sales. Total heavy duty catalyst sales dropped by 3 per cent, as 4 per cent growth across the Atlantic was offset by declines in Europe and Asia. Clean air’s underlying operating profit fell 6 per cent, impacted by £15m in one-off additional freight costs and inefficiencies linked to its new facility in Poland, which will support European light duty activities.

The health arm’s second-half operating performance is now expected to sit broadly in line with the interim period, where it experienced a 6 per cent decline in sales. Johnson Matthey was affected by the ongoing US opioid crisis, although the group sells “next to no” active pharmaceutical products that go into addictive opioid products in the US, Ms Manz says. The group offers therapies that actually treat opioid addiction, along with opioid products that are structured to avoid addictive highs. This offers an opportunity. “The opioid crisis in the US is a good thing” in the medium term for Johnson Matthey, she adds.

Bloomberg forecasts put adjusted EPS at 236p for the ear to March 2020, rising to 253p in FY2021. 

JOHNSON MATTHEY (JMAT)  
ORD PRICE:3,047pMARKET VALUE:£ 5.9bn
TOUCH:3,044-3,047p12-MONTH HIGH:3,475pLOW: 2,574p
DIVIDEND YIELD:2.8%PE RATIO:15
NET ASSET VALUE:1,410p*NET DEBT:52%**
Half-year to 30 SepTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20184.97244106.123.25
20196.8222591.824.50
% change+37-8-13+5
Ex-div:28 Nov   
Payment:04 Feb   
*Includes intangible assets of £966m, or 499p a share **Excludes lease liabilities of £77m