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Johnson Matthey - performance at top end of expectations

Sophie Lund-Yates, Equity Analyst | 8 April 2021 | A A A
Johnson Matthey - performance at top end of expectations

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Johnson Matthey Plc Ord GBP1.109245

Sell: 3,180.00 | Buy: 3,182.00 | Change 14.00 (0.44%)
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Full-year underlying profit is expected to be at the top end of expectations, at around £502m. That reflects a second half recovery in auto activity, and cost saving efforts.

The group's Health business, which is expected to outperform last year's results, will undergo a strategic review.

More detailed information will be available on May 27, when Johnson Matthey announces full year results.

The shares were up 5.7% in early trading.

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Our View

Johnson Matthey has weathered the coronavirus storm better than we'd feared. As the leading manufacturer of catalytic converters - the clever bits in car exhausts that strip out the worst emissions - the global drop off in automotive production did leave its mark, but the second half recovery has been strong.

Coupled with hefty cost saving measures, the damage to profits isn't going to be too severe at the full year. Limited damage is crucial because it gives the group the ability to continue its expansion in more sustainable vehicle technology.

The popularity of electric vehicles has risen rapidly. Global automotive manufacturers are planning a $300 billion surge in spending on electric technology over the next 5-10 years, and the UK plans to ban the sale of petrol and diesel cars completely by 2030. Conventional combustion engines are in danger of being abandoned altogether, which would be very bad news for JMAT.

In response, the group's funnelling efforts into becoming a bigger supplier of battery and fuel cell components - doubling manufacturing capacity in the UK and China. Production for eLNO, a battery component, is also ramping up-- the group's first commercial plant is on track to open within the next year and plans for a second are already in the works.

Issue is, this area of the business makes up just a tiny fraction of the whole. It's going to take a lot of time and money before it makes a more meaningful contribution.

To speed things up, JMAT's streamlining its business to focus on this sustainable tech. We would expect proceeds from a potential sale of the health business to be thrown at this strategy shift.

In the rapidly changing EV industry, there's no guarantee JMAT's picked a winning formula, and development is expensive. It's too early to say whether the group will become a key supplier. The proof is in the pudding, and until customers are buying eLNO in force it remains an unproven growth runway.

To the group's credit, the balance sheet is in reasonable shape, with net debt within the target range. That means we have no immediate concerns over the group's ability to keep ticking over.

We're encouraged by JMAT's commitment to its pivot and management's handling of the pandemic can't be knocked. But that doesn't change the fact that the group is still somewhat in limbo. We think the bumpy road associated with such a massive about turn has been somewhat overlooked, and struggle to be excited by the group's current proposition.

Johnson Matthey key facts

  • Forward Price/Earnings ratio: 14.8
  • 10 year average Price/Earnings ratio: 14.1
  • Prospective dividend yield (next 12 months): 2.4%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Trading Update

Underlying profits in Clean Air are seen coming in "moderately below the prior year." This is better than predicted, as global auto production was better than expected in the second half. Coupled with a cost savings programme, means margins rose above 13%, approaching pre-pandemic levels.

Efficient Natural Resources benefitted from a stronger performance in its refinery and trading and licencing businesses, which offset some Covid-related weakness in Catalyst Technologies. Results in this segment are projected to be broadly in line with the previous year.

Health is expected to best last year's results, helped by a particularly beneficial supply contract with Gilead.

The group continued to grow its New Markets division, where profits are projected out outpace 2019/20 levels. The group's efforts to expand production of eLNO, a battery component, are on track and plans to construct a second commercial plant is in place. Sales in Fuel Cells are expected to rise more than 20% and the group is planning to continue expanding manufacturing capacity in this segment.

The group sees net debt coming in below £850m, under 1.5 times profits. Management believes it's on track to meet its cost savings goal of around £225m by 2022/23, with £60m in savings generated this year.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.