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Johnson Matthey - Resilient in a worsening environment

Steve Clayton | 3 February 2016 | A A A
Johnson Matthey - Resilient in a worsening environment

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Johnson Matthey Plc Ord GBP1.109245

Sell: 2,165.00 | Buy: 2,168.00 | Change -6.00 (-0.28%)
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Johnson Matthey's (JMAT) Q3 trading update reveals a tough overall environment, as expected, with continued outperformance by the core Emission Control Technologies division, versus the broader global automotive market. Group underlying sales rose 3%, whilst the earlier Research Chemicals disposal led reported sales to decline by 1%.

The shares were little changed in early trading.

Emission Control Technologies, the vehicle catalytic converter division, saw sales rise 6% with profits ahead, aided by the latest Euro 6b emissions regulations. Sales of light duty vehicle catalysts were £459m, up 11% at constant currency, well ahead of the 4% growth in global car production. Heavy Duty Diesel catalysts for trucks rose 3% to £174m, but JMAT warn that US truck demand is expected to fall substantially in the next financial year.

The Process Technologies division saw sales fall 11% in challenging conditions, with only two new licences signed and weak demand from Oil & Gas customers taking its toll.

Lower prices for Platinum Group Metals and the earlier sale of the gold and silver refining businesses contributed to a 17% decline in Precious Metal Product divisional sales, with profits described as significantly down.

Fine Chemicals continuing businesses sales rose 4% to £57m, but an adverse mix led to lower profits, despite stronger sales of specialty opiates.

Revenues in the New Businesses doubled to £46m, benefitting from recent acquisitions. Operating losses reduced, as expected.

Outlook:

JMAT say that the macro environment remains challenging, but the company expects to have a strong final quarter and to deliver an underlying performance in the second half that is slightly ahead of that delivered in the first, to leave the full year outcome in line with current market expectations.

Conditions have worsened since the interims and the outlook for the following financial year suggests limited growth opportunities. Longer term, JMAT believe the structural drivers of their growth remain intact. The group will be making a presentation about the future opportunities available from the evolving automotive powertrain market Feb 4, accessible from their Investor Relations website.

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.

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. In the short term, business performance is likely to be uninspiring, but on circa 13x forward earnings, the stock is trading well below its longer term 17x average rating.

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.


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