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Johnson Matthey - Currency tailwinds boost performance

Equity research team | 17 November 2016 | A A A
Johnson Matthey - Currency tailwinds boost performance

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Johnson Matthey Plc Ord GBP1.109245

Sell: 2,258.00 | Buy: 2,261.00 | Change 19.00 (0.85%)
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Currency tailwinds boost performance

Lower sterling has proven a substantial boost to Johnson Matthey (JMAT) this quarter, contributing to 12% growth in underlying EPS. However, underlying profit before tax fell 3% at constant exchange rates (CER), with revenues down 6%. Nonetheless, the group increased the dividend 5% to 20.5p a share.

The share were broadly flat in morning trading.

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 potential 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 and 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 profits in these divisions have proven volatile in the past. This is largely a side show though. Catalysts are in the driving seat and although that means overall performance is likely to be uninspiring in the near term they show no sign of putting on the brakes.

Johnson Matthey currently trades on circa 16.4x forward earnings, versus an historic average of 14.6x, and offers a prospective yield of 2.3%.

Half year results - all figures at constant exchange rates:

The fall in first half profits was predominantly driven by a tough performance in the Fine Chemicals division. Despite increasing revenues by 4%, underlying operating profits fell 26% as a result of a less favourable product mix. JMAT expect a significantly better performance in this division in the second half.

Full year guidance remains unchanged on a constant currency basis. If exchange rates remain at the level seen at 30th September, this would result in a £65m benefit to the business for the full year.

Elsewhere in the business;

Emission Control Technologies - Accounted for 64% of group profits. Divisional profits remained unchanged despite a 3% increase in revenue. Stronger sales in Europe and Asia offset weak demand in the US.

Process Technologies - 17% of group profits. Divisional profits fell 1% as lower costs offset falling sales. The 12% fall in revenues was a reflection of continued pressure in the chemicals and oil & gas markets.

Precious Metal Products - 17% of group profits. Divisional Profits grew 4%, with revenues falling 2%. The revenue fall reflects lower sales in platinum refining and recycling with cost savings boosting the profit performance.

New Business - The division turned in an £8.5m loss in the half, an 11% improvement on a year earlier. That was driven by a continued strong performance from the Battery Technologies business, where sales grew 7%.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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 disclosure for more information.