Catalytic convertor giant Johnson Matthey's (JMAT) Capital Markets Day statement had “something for the bulls and something for the bears”, according to one leading analyst – and so it proved. So far, in the short-term at least, the bulls have won the day.
Clearly, the market liked JMAT’s first foray into the electric vehicle market. It said it would invest up to £200 million into battery material technology capacity from 2018. Once battery electric vehicle penetration reaches 10%, this market could be worth more than $30 billion (£22 billion) in sales, we’re told.
Morgan Stanley claimed the announcement “delivered a confident riposte to fears over its terminal growth given the diesel debate at the heart of the investment case”. Currently, Johnson generates 60% of its £12 billion annual sales from making exhaust catalysts for vehicles. It had been feared the growth of electric vehicles, which have no need for catalytic converters, would hit profits.
Shares rocketed 30% on the statement Thursday and continued to climb Friday to fresh highs, eventually breaching the £35 barrier last seen in October 2016. At 3,477p currently, weekly gains were almost 23%. Only three weeks ago the price had slumped to a 17-month low at 2,681p.
There were other notable parts of the statement, including a strategy for growth and value creation across all sectors. These include sustained growth in its Clean Air division over the next decade; break-out growth in Battery Materials and Health; and above-market growth in Efficient Natural Resources.
In the medium-term, this will generate attractive returns to shareholders by expanding group return on invested capital (ROIC) to 20%, from 17% in FY16/17; delivering mid-to-high single-digit earnings per share (EPS) compound annual growth rate (CAGR), consensus is for 6-7%; and continuing a progressive dividend policy.
It also outlined scope for further savings of £50 million over three years from 2018/19, in addition to the £25 million already announced back in June.
Chief executive Robert MacLeod says his company aims to be “one of the best-performing, most trusted and admired specialty chemical companies in the world”.
Charles Webb, equity analyst at Morgan Stanley, notes though that much of the focus will be on the nickel-rich battery materials investment “and how credible this opportunity is for a company thus far seen as a net loser from an acceleration in electric vehicles”.
Webb says he is ‘overweight’ Johnson Matthey. Deutsche Bank is a fellow bull, with a target of £36 on the stock.
Deutsche analyst Martin Dunwoodie explains that, trading on a forward price/earnings (PE) ratio for 2017/18 of 13 times, Johnson Matthey is “one of the cheapest specialty names in the sector, with these long-term structural growth undervalued”.
The bear case is proposed by UBS’s Andrew Stott. It’s still some way behind rivals Umicore and BASF, which have already ploughed around €400 million (£353 million) each. And Stott cautions that first production is not likely until 2021/22, by which time other players could be moving to newer technologies.
Dunwoodie’s ‘sell’ rating comes with a price target of 2,650p and assumes 30% penetration of electric vehicles in Europe by 2025 and a diesel share of 7%. “The current valuation is at the high end of our published sum-of-the-parts scenarios,” he argues.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.