Questor: Johnson Matthey is at a fork in the road but don’t trade it in for a new model just yet

The presence of fewer vehicles on the roads during lockdown left city dwellers breathing more easily. This beneficial side effect of reduced economic activity has spurred on clean air campaigners intent on making sure that smoggy metropolises never return.

They will be cheered that the switch to greener vehicles already has momentum. By the end of July 66,000 electric vehicles had been sold this year in Britain, almost as many as last year even though car showrooms were shut for weeks. Investors’ excitement at what the future holds has propelled Tesla’s market value to about 14 times that of the granddaddy of the industry, Ford.

This acceleration makes us wonder what is next for Johnson Matthey, the FTSE 100 company and platinum metals specialist that is a major supplier of catalytic converters. Its clean air division last year delivered 55pc of operating profit and 63pc of sales, net of the precious metal trading that inflates Matthey’s top line without really contributing to profits.

Consumers’ enthusiasm for electric cars is good for the planet but less so for Matthey, because no catalytic converter is required. Better for Robert MacLeod, the chief executive, if hybrid models gain popularity because the group can also sell its developing battery capability.

For now, tighter regulation has been a boon, for example in vans, where Matthey grew European sales by 2pc last year in a declining market because income per vehicle rose. Some markets are also playing catch-up with the clean-up, which explains why the company will open new clean air plants in China and India this year to meet demand.

The division should be a good source of cash in future as investment tails off.

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Mr MacLeod disclosed last month that the group’s clean air sales were 50pc down in the last quarter, but the improving trend that saw only a 20pc drop in June as car plants reopened should be repeated in July. Some 75pc of Matthey’s costs in this area are variable.

That is just as well given that in April industry watchers at IHS Markit said they expected global vehicle sales to decline by 22pc this year to 70.3 million, led by America, where domestic sales of cars and trucks will be the lowest since 2010.

The company reported a £60m profit hit from Covid-19 in the year to March but said it would strip out an extra £80m of costs over three years in mitigation.

A 6pc fall in annual operating profit would have been worse were it not for a 40pc spike in profits from Matthey’s other big division, efficient natural resources, whose refining arm benefited from soaring palladium and rhodium prices. This is unlikely to be maintained as industrial demand falls.

Matthey’s prospects hinge on how well it fares in two new areas. Its eLNO battery materials, of interest to car manufacturers and power cell providers, will soon have five customers in full cell testing and a commercial plant on stream in 2022.

Its hydrogen production technologies promise to play a role in the emerging market for so-called “blue” hydrogen, where associated carbon emissions are captured and stored. Last month the EU set out a bold target in its hydrogen strategy of establishing 40GW of capacity by 2030.

Analysts at Berenberg, the bank, think the market underestimates Matthey’s potential in both of these activities, which they value at a combined £624m in a sum-of-the-parts analysis.

While investors wait for orders to roll in, the group’s finances look sound. It halved the final dividend to conserve cash but made clear that the cut was not permanent. At £1.1bn, net debt is at the bottom end of Matthey’s range as a multiple of earnings.

The shares have lost 25pc since Questor’s tip in February last year but have regained ground this summer since the pandemic shock. Trading at 12 times forecast earnings for 2022, Matthey is at a fork in the road along with the rest of the car industry but should not be traded in for a new model just yet. 

Questor says: hold

Ticker: JMAT

Share price at close: £22.95

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