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Johnson Matthey - new CEO, new strategy

Johnson Matthey - new CEO, new strategy

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Johnson Matthey Plc Ord GBP1.109245

Sell: 1,870.50 | Buy: 1,872.00 | Change -48.50 (-2.52%)
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Full-year underlying sales rose 5%, ignoring the effect of currency changes, to £3.8bn. That was driven by a partial recovery in Clean Air and good performance from Efficient Natural Resources.

Underlying operating profit, which excludes £440m of impairment and restructuring charges related to the disposal of the Health and Battery businesses, rose 21% to £553m.

The group warned ''visibility is low and the outcome for the year remains uncertain'' and have guided for 2022/23 full year underlying operating profit in the lower half of £491m-£641m.

The board proposed a final dividend of 55p, taking the total for the year up 10% to 77p.

The shares fell 4.9% following the announcement.

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Our View

Johnson Matthey is the leading manufacturer of catalytic converters - the clever bits in car exhausts that strip out the worst emissions. That makes the shift to electric vehicles a serious concern.

JMAT's response was to pivot to become a battery material manufacturer. That was until management scrapped the plans out of the blue and went back to the drawing board. Now armed with a new CEO and a refreshed strategy, the business is attempting to find its place in the new world.

Before we look at what's to come, we'd be remiss for not mentioning the impact all the stripping back of services has had. The group's had to sell the Health and Battery Materials businesses for a combined loss of over £600m, that's bad business by anyone's standards. But sometimes you've just got to cut the cord and book the loss to pave way for something better, and that's exactly the thought process here.

On the bright side, aside from one off charges which are largely non-cash items, these sales will cause very little disruption to the group's performance as the businesses were loss making. It's the Clean Air and Efficient Natural Resources (ENR) divisions that drive profit and these form the backbone of the new strategy. JM's the worlds largest recycler of platinum group metals, which are funnelled into other business segments and sold to consumers as part of the PGM Services businesses.

The new strategy looks to focus on three markets where decarbonising efforts are needed: Automotive, Chemicals and Energy. PGM Services will form the backbone and refine around 80% of the groups PGM needs. In truth, the real change is a push in Hydrogen Technology which will see investment ramp up and be split out into its own division. The aim is to generate around £200m in revenue by 2024/25, that's a hefty increase from the £25m it generated last year.

Fortunately, traditional cars won't go the way of the dodo for some time. And in the meantime, the automotive business is generating significant cash flows. Longer term, with the EV (Electric Vehicle) revolution gathering pace, JM needs to scale up the new business divisions if it's going to have long term stability.

Healthy cash generation from the Clean Air business, together with a relatively strong balance sheet mean JM has the financial firepower to invest in the new strategy, executing won't be easy though.

New CEO, Liam Condon has a long road ahead and we don't expect it to be a straightforward one. The core business is humming for now, but we can't say how much longer that'll be the case. We'd like to see signs the new strategy can build to scale before getting more upbeat on the prospects.

Johnson Matthey key facts

  • Forward price/earnings ratio: 10.5
  • Ten year average price/earnings ratio: 13.9
  • Prospective dividend yield (next 12 months): 3.4%

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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Full Year Results (constant exchange rates)

Liam Condon joined as CEO in March. Having completed a review, the business will focus on four business areas moving forward: Clean Air, Catalyst Technologies, Hydrogen Technologies and PGM Services. The transformation programme is expected to deliver £150m in annual cost savings by 2024/25.

The sale of the Health business is expected to complete by the end of May. The group has also found a buyer for its Battery Materials business, expected to complete in the summer of 2022 for £50m in cash and a minority equity stake in the buyer's business, EV Metals Group. The group has recorded a £363m exceptional loss on the sale.

Clean Air sales rose 5% to £2.5bn as demand partially recovered helped by a 17% rise in heavy duty diesel. Chip shortages and supply chain disruption continues to hinder vehicle production. Underlying operating profit rose 17% to £302m as the transformation programme moves forward, with focus on producing at the most efficient plants.

In Efficient Natural Resources, sales rose 9% to £1.0bn with growth across both business segments. PGM Services benefited from higher metal prices pushing sales up 13%. That helped underlying operating profit for the division rise 33% to £358m.

Other Markets sales fell 4% to £379m as manufacturing constraints impacted Hydrogen Technologies as the business scales up. The sale of Advanced Glass Technologies completed at the start of 2022. The division reported an underlying operating loss of £21m driven by higher investment in Hydrogen Technology and a loss from the Battery Materials business, the sale of which is underway.

Free cash flow fell from £295m to £221m, largely due to working capital changes. Net debt, excluding the Health business, was up from £770m to £856m. Net debt, including pension obligations, was 1.2 times cash profit (EBITDA), below the target range of 1.5-2.0 times.

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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.