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Johnson Matthey - Another solid performance

Nicholas Holt | 20 July 2016 | A A A
Johnson Matthey - Another solid performance

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Johnson Matthey Plc Ord GBP1.109245

Sell: 2,089.00 | Buy: 2,090.00 | Change -7.00 (-0.33%)
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Johnson Matthey announced a solid set of Q1 results this morning, with sales from continuing businesses up 6% to £822m (2% at constant exchange rates). Underlying profit before tax on a continuing basis is broadly in line with last year, with the full year outlook at constant exchange rates remaining unchanged. Johnson Matthey shares rose 1.5% in early trading.

If current exchange rates prevail for the remainder of 2016/17 the positive translational impact to full year underlying operating profit would be approximately £40 million.

The group continues to expect 2016/17 performance to be ahead of 2015/16, although weighted towards the second half. The group does not currently expect the UK's vote to leave the EU to have a material long term impact.

Emission Control Technologies (ECT)

Emission Control Technologies, the group's automotive catalyst division, saw sales grow 9%, relative to a year earlier, to £521m (5% at constant exchange rates).

Light duty vehicle catalysts increased 12% to £331m, continuing to outpace global car growth of 2% year on year. Growth was spread across all regions with a particularly strong performance from Europe. Heavy duty catalyst sales fell 5% to £190m - held back by the slowdown in demand for Class 8 trucks in North America.

Underlying operating profit in ECT was broadly in line with the same period last year.

Process Technologies

Sales in Process Technologies rose 3% to £134m (down 1% at constant exchange rates).

Oil & Gas sales were lower following reduced demand in the Gas Processing business after a strong 2015/16 and continued headwinds in the Diagnostic Services business as a result of the low oil price. Demand for hydrogen catalysts was strong in the quarter.

The Chemicals businesses saw sales increase with good demand for speciality products for petrochemical applications offsetting ongoing weakness in licensing activity. No new licences were signed in the period with low levels of licensing activity to continue over the year.

Precious Metal Products

Sales grew 6% in the Precious Metal Products division to £91 million (up 1% at constant rates).

Underlying operating profit was down, principally due to lower average pgm prices (platinum averaged $1,010/oz, down 11% on the same period last year, and palladium average $573/oz, down 25%).

Fine Chemicals

Sales in the Fine Chemicals businesses were flat at £59 million (5% down at constant rates).

Underlying operating profit for the division was lower, following the disposal of Research Chemicals last September.

New Businesses

New Businesses sales increased 14% to £43 million (11% ahead at constant rates).

The division saw good demand for battery materials and an early contribution from the recent Water Technologies acquisitions made in April and May. Operating loss for the division continued to be in line with expectations for the full year.

Our View

Johnson Matthey (JMAT) is, first and foremost, one of the world's leading producers of catalytic converters and industrial process catalysts.

Environmental pressures to reduce vehicle emissions are only likely to increase, implying increasing demand for Johnson Matthey's technologies. The VW emissions scandal is likely to speed up that process.

True the vehicle market can be cyclical, which has an impact on earnings and exposes JMAT to downturns, but over time JMAT tends to grow faster than its customers because increasing catalyst complexity delivers pricing power. This, combined with a relatively small group of competitors, means that operating margins are strong. As a result operating profits have tripled since the turn of the century and shareholders have been rewarded with dividends that have done the same.

There are speed bumps ahead though. A rapid move to wholly electric vehicles might hurt, since they need no catalysts. Fortunately, JMAT is increasingly a leading battery technology business too. The Battery Technology division broke even for the first time in FY16 a nd is at the forefront of research into the technologies that will enable the mass adoption of all-electric cars in the long term. Substantial further growth in battery material sales this time out is welcome news.

Demand in the smaller divisions, serving industrial process markets with catalyst technologies, has been weaker recently, and the Precious Metals division, where profits are strongly linked to Pgm prices has been struggling. This is largely a side show though. For the time being its catalysts in the driving seat and although overall performance is likely to be uninspiring in the short term they show no sign of putting on the brakes.

Johnson Matthey currently trades on circa 16x forward earnings, slightly below its historic average, and yield 2.4%.

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.