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Hybrid potential for Johnson Matthey

The future appears bright for Johnson Matthey, which is covering its bases in an evolving market for vehicle technology
November 21, 2018

An anaemic car market beset with difficulties over emissions regulation and product recalls might have been expected to hit Johnson Matthey (JMAT). The self-appointed “leader in sustainable technologies” resisted the uncertainty that has plagued auto markets, posting a 10 per cent increase in half-year operating profits at constant currencies.

IC TIP: Hold at 3,040p

Johnson Matthey’s Clean Air division, which supplies catalytic converters, continues to perform well. Light duty sales in Asia beat the market with growth of 7 per cent, while the group's share of the European light duty diesel market now sits at circa 60 per cent and remains on course to hit 65 per cent by March 2019. The group remains one of the world's three leading suppliers, something of an issue given national and corporate pledges to embrace pure electric vehicles (EVs). Chief financial officer Anna Manz remains convinced that hybrid vehicles (which employ catalytic converters) will lead the transition because “if you look at what a consumer wants and needs… battery electric doesn’t yet provide all of that,” she says.

Until it does, improving engine management systems that switch hybrid cars between pure electric and more conventional fuel usage offer the group two significant opportunities. It can continue to sell its catalytic converters, but it also expects to start producing its eLNO battery material in 2021-22, which it can also sell into the hybrid market.

Investment in the technology has hit the new markets division, where operating profits are flat. But eLNO represents a sensible hedge on the direction of the automobile industry. Should we actually see the day that our roads become emissions-free, Johnson Matthey will already be providing materials for car batteries. Until then, it can cater to both hybrid and pure EVs, not forgetting its ascent in the diesel market.

Morgan Stanley reiterates its price target of 3,900p a share using a blended average of its discounted cash flow and sum-of-the-parts valuations.

JOHNSON MATTHEY (JMAT)  
ORD PRICE:3,040pMARKET VALUE:£58.8bn
TOUCH:3,039-3,046p12-MONTH HIGH:3,873pLOW: 2,737p
DIVIDEND YIELD:2.7%PE RATIO:18
NET ASSET VALUE:1,323p*NET DEBT:40%
Half-year to 30 SepTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20176.4820587.921.75
20187.1124410623.25
% change+10+19+21+7
Ex-div:29 Nov   
Payment:05 Feb   
Includes intangible assets of £902m, or 466p a share