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Johnson Matthey - 150p special dividend, expects return to growth

Steve Clayton | 19 November 2015 | A A A
Johnson Matthey - 150p special dividend, expects return to growth

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Interim results from Johnson Matthey show a 3% decline in underlying earnings per share to 86.3p. The reported figure of 137.9p includes a profit of £130.9m on the disposal of their Research Chemicals business. The proceeds of that disposal are enabling a special dividend of 150p per share to be paid, on top of an ordinary, interim dividend of 19.5p, 5% higher than the previous year. The large working capital outflow seen in H2 2014/15 reversed, with an improvement of £386m in the period.

Profits saw good growth from the Emissions Control Technologies division, which makes catalytic converters for vehicles, but a sharp drop in profits from the Process Technologies and Precious Metal Products divisions. Cost cutting will support earnings in the second half, leading to a full year performance, from the group's continuing businesses, similar to 2014/15. Johnson Matthey expects a return to growth in the new financial year, beginning April 2016. Johnson Matthey stock reacted positively, rising 5% in early trading.

Emission Control Technologies division - sales up 8%, profits up 16% - growth was driven by tighter legislation covering the emissions of nitrogen oxides (NOx), by diesel cars, known as the Euro 6b rules. Asian light duty truck growth was strong, as were catalyst sales for heavy duty trucks in North America.

Process Technologies - sales flat, profits down 28% - good sales to customers in the Chemicals industry, but with a less favourable mix and lower licensing activity squeezing profits. Oil & Gas catalyst sales were ahead, but the upstream demand for Diagnostic Services was much weaker.

Precious Metal Products - sales down 15%, profits 31% lower - Platinum group metals (Pgm) refining earnings hit hard by the 20% fall in Pgm prices. Manufacturing performance was mixed.

Fine Chemicals - sales down 3%, profits down 8% - lower sales of active pharmaceutical ingredients and a safety shutdown in the USA impacted performance.

New Businesses - underlying sales 27% ahead - good growth in Battery Technologies, supported by acquisitions. Underlying losses reduced.

CEO Robert MacLeod said "Johnson Matthey remains well placed to benefit from major global sustainability drivers such as the continued drive to improve air quality, energy security, urbanisation and the increasing need for healthcare. The restructuring actions we are taking in the second half will benefit the group's results towards the end of our financial year and this, together with attractive key end markets, position the group to return to growth in 2016/17."

Our View

Johnson Matthey is one of the world's leading producers of catalytic converters and industrial process catalysts. Government legislation to reduce pollution leads to demand for increasingly sophisticated catalysts. There are a relatively small group of competitors and operating margins are strong. Operating profits have tripled since the turn of the century and shareholders have been rewarded with dividends that have done the same although this is not a guide to the future.

The demand for ever more complex catalysis processes, to make trucks, automobiles and industrial processes cleaner, is unlikely to go away. Johnson Matthey's end markets can be cyclical, but over time it tends to grow faster than its customers, because of that increasing catalyst complexity which delivers pricing power.

Recently, demand in the smaller divisions, serving industrial process markets, with catalyst technologies has been weaker, and the Precious Metals division, where profits are strongly linked to Pgm prices has been struggling. But demand for the Catalytic Converters business has continued to be firm.

The improved cash flow seen in the interims is hugely welcome. The company had said that the extraordinary outflow seen late last financial year was exceptional and set to reverse, and so it has, with JMAT hitting their cash conversion targets in H1, settling a lot of investor nerves out there.

Johnson Matthey is one of our "Five Shares to Watch in 2015" and so far, we have watched in horror. So the positive reaction to the interim results is hugely welcome, after a steady decline in the shares so far this year.

Environmental pressures to reduce vehicle emissions can only increase; the VW emissions scandal is likely to see a further increase in pressure to improve real world, as well as test lab emissions performance. A move to wholly electric vehicles would hurt, since they need no catalysts, but JMAT is a leading battery technology business too and is at the forefront of research into the technologies that will enable the mass adoption of all-electric cars in the long term.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.