Johnson Matthey slow to pass on costs

In some ways, chemicals company Johnson Matthey (JMAT) is facing the same plight as the wider British economy – its debts are getting bigger and it currently lacks the growth to meaningfully tackle them.

On a reported basis, revenue fell by 14 per cent for the six-month period, although this was largely the result of slightly weaker precious metals prices – the company’s PGM services arm recycles platinum group metals and provides chemical catalysts for combustion engines.

Stripping out precious metals, sales were up by 10 per cent to just over £2bn. Underlying operating profit fell by 30 per cent, however, with many of its divisions facing higher costs that they were unable to fully pass through to customers.  

For instance, the clean air arm, which makes catalysts for petrol and diesel engine cars, saw its operating margin cut by around a third to 8.5 per cent. Margins in the PGM arm fell by a fifth as prices and volumes dropped as energy costs jumped.
Although its cash position was bolstered by disposals, net debt grew by more than £100mn to £963mn. This is mainly due to exchange rate differences, given that most of its borrowing is dollar-denominated.

After ditching its battery metals business last year, the company needs new sources of revenue given that its fortunes are still largely tied to petrol and diesel-powered engines. New chief executive Liam Condon, who took charge in March, is stepping up investments in catalysts for alternative fuels and in hydrogen technologies – it is building an £80mn ‘gigafactory’ to scale up the production of hydrogen fuel cells, for instance.

The issue for investors is whether the company continues to generate enough from existing businesses to fund the transition, keep debts in check and pay dividends.

The company certainly thinks so – it expects the clean air arm to generate £4bn of free cash flow over the next decade. It currently has more than £400mn of cash on its balance sheet and expects to generate the first £35mn of annualised cost savings of £150m this year. It also expects a better operating performance in the second half, driven by a 4 per cent hike in global car production.

How durable customer demand for cars will be as economies weaken next year is a concern, but growth is still anticipated and with the shares currently trading at 10-times earnings its valuation remains undemanding. Buy.

Last IC View: Buy, 2,201p, 26 May 2022