Johnson Matthey breathes easy on Clean Air

Tip Updates 

Johnson Matthey breathes easy on Clean Air

HOLD

Tip Update: Hold at 3433p

Tip style
VALUE
Risk rating
MEDIUM
Timescale
LONG TERM
Our previous tip
We said BUY at 2779p on 31 Aug 2017
Tip performance to date
+24%

Last year’s buy call (2,779p, 31 Aug 2017) on Johnson Matthey (JMAT) was partly based on a basic valuation assessment – the shares were changing hands at a discount to peers on an enterprise/cash profit basis, whereas they had historically traded at a double-digit premium. The subsequent share price movement has brought that metric back into line, but there was also a counterintuitive aspect to our recommendation.   

It came shortly after a flurry of pledges from national governments and auto-makers on their planned transition to electric motoring, something of an issue given the 201-year old speciality chemicals group is one of the biggest producers of catalytic converters – surplus to requirements in pure electric vehicles (EV). So it may seem curious that the Clean Air division, which accounts for nearly two-thirds of group revenue, still recorded 9 per cent sale growth at constant currencies.

The Light Duty Vehicle (LDV) Catalysts business grew ahead of global vehicle production, keeping the group on track to capture 65 per cent of the Europe’s light duty diesel market by next March. Although the overall market is likely to contract over time, Johnson Matthey is positioning itself to secure greater market share, with its prediction of "sustained growth over the next decade” also supported by increasingly stringent regulatory measures on air quality in auto growth markets, most notably China.

Meanwhile, the group’s financials were in line with consensus, with constant-currency operating profit flat on the previous year at £525m, while reported earnings were constricted through £90m in impairment and restructuring charges, together with a £50m legal settlement. The top line benefited from higher precious metals prices, although they also impacted working capital outflows. Operating performance for 2019 is expected to be in line with the group's medium-term guidance of mid-to-high single-digit growth, but revenues are expected to take a £41m knock through unfavourable currency translations.  

Morgan Stanley gives a 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:3,784pMARKET VALUE:£7.3bn
TOUCH:3,783-3,784p12-MONTH HIGH:3,587pLOW: 2,681p
DIVIDEND YIELD:2.1%PE RATIO:28
NET ASSET VALUE:1,229p*NET DEBT:29%
Year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201411.240716863.0
201510.149621168.0
201610.738616671.5
201712.046220175.0
201814.132015580.0
% change+17-31-23+7
Ex-div:7 Jun   
Payment:7 Aug   
*Includes intangible assets of £869m, or 449p a share

IC View

Chief financial officer Anna Manz told us that she thinks hybrid vehicles (which still require clear air technologies), as opposed to pure EV, will play "the dominant role in the transition" – we concur. Nevertheless, the group is moving with the times, and remains on track to bring the first commercial plant for its innovative eLNO battery materials into production by 2021-22. We wouldn’t be surprised if the group is still around in another 200-years from now, yet with the value argument now redundant, we move back to hold.

Last IC View: Buy, 3,214p, 22 Nov 2017

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