Sales at Johnson Matthey have returned to pre-pandemic levels as demand recovered from Covid headwinds in Clean Air and Efficient Natural Resources benefitted from higher precious metals prices. Helped by the rising cost of precious metals, operating profit is ahead of pre-pandemic levels.
At constant currency and metals prices, the group now expects underlying operating profits to grow in at least the mid-teens.
The shares were down 2.3% following the announcement
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 sales are now back at pre-pandemic levels and buoyant commodity prices have helped operating profit march ahead of 2019 levels.
There's another dark cloud hovering over JMAT's business, though. The semiconductor shortage is also threatening to dampen demand, though the impact has been muted so far. A swift recovery is crucial because it gives the group the ability to continue its expansion into more sustainable vehicle technology.
The popularity of electric vehicles (EV) 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's catalysts.
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 the second should break ground in Finland later this year. The group's also inked a deal with Plug Power to develop green hydrogen technology, which could put JMAT on the map as a key supplier.
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.
Investors should remember that while hydrogen and electric vehicles may sound exciting, the entire New Markets division makes up just 3.5% of total revenue. It's going to take a lot of time and money before it will become a suitable replacement for converter revenues. Luckily for JMAT, the transition to EVs won't happen overnight. But the writing's on the wall, so the group has no choice but to throw every last pound at expanding a somewhat unproven business.
To the group's credit, the balance sheet is in reasonable shape, with net debt below 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
- Price/Earnings ratio: 12.3
- 10-year Average Price/Earnings ratio: 14.1
- Prospective dividend yield (next 12 months): 2.7%
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.
Full Year Results
In Clean Air, strong demand in the second half of last year was maintained. First quarter sales came in 'moderately' below fourth quarter levels as a result of supply chain disruptions in the light duty segment. The shortage of semi-conductor chips hit production volumes as automotive and truck manufacturers experienced delays. This is expected to persist, but the group anticipates 'strong' cash generation for the full year.
Higher average precious metals prices meant first quarter sales in Efficient Natural Resources were up significantly year-on-year. Catalyst Technologies saw first quarter sales dip from fourth quarter levels due to seasonality.
The Health business, which is under strategic review, is expected to deliver strong full year sales. However strong demand in 2020 made first quarter comparisons more difficult.
Hydrogen, Battery Materials and Value Business has seen progress on a number of key customer agreements. The group began work on expanding its hydrogen business' manufacturing capability in the UK and China, with the first phase due online in early 2023. The green hydrogen production business continues to expect its first commercial sales in 2022, and construction of the eLNO manufacturing plant remains on track.
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