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Johnson Matthey looks to new exhaust engine opportunities

New boss outlines plan to cut costs and find margin growth from net zero goals while also maintaining its catalytic converter profits for as long as possible
May 26, 2022
  • Dividend uptick following completion of share buyback programme
  • Some cash recouped from sale of battery materials division

A slimmer Johnson Matthey (JMAT) is hopeful that global trading conditions will improve this year even as the automotive sector struggles to keep supply chains running because of the war in Ukraine and lockdowns in China. 

The first results announcement under new chief executive Liam Condon coincided with the end of the company’s expensive foray into the electric vehicle battery manufacturing space, as the sale of the division for £56mn to two buyers was confirmed. The sale announcement saw the company take a £314mn impairment charge. The company also sold off its health division, for £325mn, in the period, in a deal that will soon close, as well as its advanced glass technologies business for £178mn.   

Johnson Matthey now has to both show margin improvement through the performance of the catalytic converter business (through the clean air division) and also growth from the hydrogen division, which is the up-and-coming technology that the board has backed to carry the company beyond the internal combustion engine for vehicles. 

This margin effort involves shifting production of catalysts from the UK to Poland and Macedonia, in the face of inflation and chip shortages hitting demand. On an underlying basis, the operating margin increased from11.2 per cent to 12.3 per cent for the division, which saw underlying operating profits rise by 12 per cent in the year to 31 March. 

The efficient natural resources division, which covers platinum group metal (PGM) recycling and the production of chemical catalysts for fuel manufacturers, saw an underlying operating profit boost of 30 per cent on the back of strong PGM prices. 

Even as governments and automakers look at phasing out petrol and diesel powered cars, Johnson Matthey said opportunities would continue coming from this space. “Clean air will remain a significant business well into the next decade even as the world transitions towards lower and zero-carbon technologies,” said Condon.

In the next three years, the margin hunt will look like cutting £150mn in costs annually (at a one-off cost of £100mn), with capital spending at around £1bn in the same period. The strategic review also set the dividend payout ratio at 40 per cent to bring the dividend back to pre-Covid-19 levels. 

Analysts are broadly optimistic about the company getting beyond its pre-pandemic cash profit levels. Consensus estimates put the 2023 cash profit at £745mn, a small uptick on 2022, although the margin is set to remain at 18-20 per cent for some years. 

This is a clear strategy – do more of the same but become more profitable, basically – in which we see short- and medium-term gains as the car industry gets back to full capacity. We still have long-term questions over Johnson Matthey’s strategy but, for now, this looks promising at a consensus PE ratio of 10. Back to buy. 

Last IC View: Hold, 2,177p, 24 Nov 2021

JOHNSON MATTHEY (JMAT)  
ORD PRICE:2,201pMARKET VALUE:£4bn
TOUCH:2,201-2,204p12-MONTH HIGH:3,252pLOW: 1,650p
DIVIDEND YIELD:3.5%PE RATIO:na
NET ASSET VALUE:1,336pNET DEBT:35%
Year to 31 MarTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
201810.332015580.0
201910.748821585.5
202014.630513255.6
202115.422410770.0
202216.0195-52.677.0
% change+4-13-+1
Ex-div:9 Jun   
Payment:2 Aug   
*Includes intangible assets of £635mn, or 348p a share