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Energise with Johnson Matthey

The automotive chemicals specialist is preparing itself for the future of cars
September 5, 2019

Johnson Matthey’s (JMAT) exposure to the ailing automotive sector has dampened the market’s enthusiasm for its shares, as have growing signs that the automotive industry is set to embrace electrification, signalling a potential long-term decline in demand for Matthey's catalytic converters. However, we feel the group is living up to its reputation as a pioneer of sustainable technologies and complicated chemistry, with its recent investments in the future of the automotive industry. Indeed, the company’s market share gains, tailwinds from precious metal prices and investment in cutting-edge battery materials makes us think the future may not be as grim the two-year share price low suggests.

IC TIP: Buy at 2,910p
Tip style
Speculative
Risk rating
Medium
Timescale
Long Term
Bull points

Rising palladium demand

Investing for electrification of cars

High market share

Raising capacity

Bear points

Slowing automotive market

Uncertain long-term outlook for catalytic converters

Johnson Matthey’s activities supply every corner of the automotive market, and more. The company is made up of four divisions: the dominant two businesses for sales profits are clean air and efficient natural resources, with smaller contributions from health and new markets.

All segments grew revenues last year, with the largest division, clean air, reporting an 11 per cent increase in sales – which excludes amounts related to volatile platinum group metals (PGM) prices – and a 13 per cent increase in profit to £393m. Clean air, which includes catalytic converters, made up 66 per cent of sales and 77 per cent of profit. The efficient natural resources business, which operates the largest secondary PGM refiner in the world, accounted for 24 per cent of sales and 35 per cent of profit. Sales were up 4 per cent last year, while rising PGM prices added £16m to operating profit, supporting a 15 per cent rise overall to £181m.

Sentiment towards the shares is being weighed on by signs of slowing demand for cars globally. Meanwhile,Johnson Matthey’s catalytic converter business faces an existential threat from the potential long-term demise of the internal combustion engine as the industry looks towards electrification to solve environmental issues.

However, any largescale transition to electric cars will take considerable time, and for now efforts to reduce pollution are boosting demand for Johnson Matthey’s clean-air products. The introduction of stricter regulation in China and India is expected to be of particular benefit to sales in the years ahead.

For one thing, increasing global regulation continues to ensure demand for Johnson Matthey's products is well ahead of demand for cars themselves, while electrification will not happen overnight. Since the introduction of tighter emissions rules in Europe following the Volkswagen scandal, Johnson Matthey expects tightening diesel rules in China and India to push up returns. The company predicts a surge in demand for palladium, the use of which in autocatalysts (which Johnson Matthey manufactures) is forecast to rise by 9 per cent in 2019, which will have partly been driven by Chinese legislation.

PMG price rises should also continue to benefit the group’s refining and trading businesses. Liberum analysts forecast that Johnson Matthey could experience a £27m boost to full-year 2020 materials recycling profits due to higher PGM prices, which would amount to around 5 per cent of group operating profit.

Most importantly, Johnson Matthey is willing to sustain temporary hits to profits with an investment drive that should help it maintain its position as one of the world’s leading battery materials manufacturers. Its new-markets arm saw operating profits drop 85 per cent to £2m over its 2019 financial year, partly owing to further investment in its eLNO battery cathode material, which hopes to significantly boost battery efficiency. It recently signed its first long-term supply agreement for raw materials with Nemaska Lithium. It is building a new manufacturing facility for eLNO in Poland, as well as investing in its manufacturing in China, and it will begin construction of a plant in India next year.

We like the complementary nature of Johnson Matthey’s divisions. Clean air, natural resources and new markets work in tandem to help the group maintain its position as a market leader. The clean air division secured over 65 per cent of the European light diesel market over its most recent financial year. The company expects hybrid cars to lead the electric car revolution for now, and has previously expressed the view that fully electric vehicles aren’t quite far enough down the road to meet consumer requirements. Disruption in these spaces needn’t harm the group, which will continue to profit from catalytic converter sales as battery materials sales grow. 

Johnson Matthey (JMAT)  
ORD PRICE:2,910pMARKET VALUE:£5.6bn 
TOUCH:2,910-2,911p12-MONTH HIGH:3,692pLOW:2,574p
FORWARD DIVIDEND YIELD:3.3%FORWARD PE RATIO:11 
NET ASSET VALUE:1,359p*NET DEBT:33% 
Year to 31 MarTurnover (£bn)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201712.048224175.0
201810.348615580.0
201910.752321586.0
2020**11.155123487.0
2021**11.660425695.0
% change+4+5+9+1
NMS:500    
BETA:1.59    
*Includes intangible assets of £914m or 476p per share
**Citi forecasts, adjusted PTP and EPS figures