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Market unconvinced by Johnson Matthey’s progress
Following a strong rise in profit and a big hike in its dividend, it would seem there’s reason to be optimistic on FTSE 100 stock Johnson Matthey (JMAT).
But it’s not a view shared by the market as the chemical company’s shares failed to be lifted by its latest full-year results.
Pre-tax profit in the year to 31 March jumped 53% to £488m, at the top end of expectations, and revenue grew 5% to £10.74bn. The firm also proposed a 7% dividend increase.
The share price was particularly weak immediately after the results were published on 30 May. It would appear investors were more fixated on its New Markets division, which reported an operating loss of £1m in the six months to the end of March, well below the £10m profit that was expected.
Johnson Matthey chief financial officer Anna Manz tells Shares the profit drop in the division was for a ‘good reason’, as the company continued to invest in eLNO, a battery material for electric vehicles (EV) that it hopes will disrupt the market and plans to have in commercial production by 2022.
Some investors still harbour concerns that the structural switch to EV could harm Johnson Matthey, given around 70% of its revenue comes from its Clean Air division, which sells catalysts to reduce emissions from vehicles.
While Manz concedes growth in the division ‘may start to tail off’ in the future as the EV shift takes hold, she points out the division enjoyed 11% sales growth in a sector which has struggled with a 2% decline in global vehicle production, and adds there are still plenty of growth opportunities.
She says: ‘That’s down to the great technology we have and as legislation [around vehicle emissions] continues to tighten in Europe, and Asia in particular, it requires more complicated catalysts.
‘Legislation in Asia has tightened massively, and we see it as a big growth area from 2020 onwards.’
Analysts at investment bank Citi agree with Manz’s assessment, and believe the division’s ‘sustained performance’ is over-looked by the market, with concerns ‘overly concentrated’ on the risks facing the global auto industry, which in Citi’s view are receding.
Fellow investment bank Berenberg points out Johnson Matthey’s performance has been particularly strong given its rivals have all issued profit warnings due to issues in the auto industry.
Manz also highlights the efficiencies Johnson Matthey has achieved, savings which have been reinvested to deliver long-term growth.
She says: ‘We’ve made significant efficiencies – it will be £110m by the time we’re done – and we’re able to reinvest that to build the agile platform we need to deliver growth in four to five years’ time.’
We rate Johnson Matthey as a great stock to own for the long-term.