Investing in Johnson Matthey used to be a binary bet on the future of the internal combustion engine.
The chemicals giant, which has its roots in a gold testing business in 1817, earns the bulk of its money making catalysts that help remove impurities from the exhausts of cars, buses and lorries. Its emissions control division contributed more than 60% of sales and profits in its most recent financial year.
Volkswagen’s emissions rigging scandal has changed all that as regulators and governments across the globe rush to ban diesel engines. In Britain the government has gone a step further, pledging to plan to ban new petrol and diesel cars by 2040.
The FTSE 100 firm has not been standing idly by as its core market begins to wilt, but the VW affair has given it added impetus. Since it entered the lithium-ion market in 2012, Johnson Matthey has been targeting electric vehicles as the cornerstone of future growth.
At the heart of this strategy is its new, higher-energy density cathode material, which allows car makers to pack more juice into their batteries and extend range.
In September, its shares were turbocharged by its decision to invest £200m in a factory to produce 10,000 tons of this cathode material a year by 2021.
Yet investing in Johnson Matthey comes with health warnings. There’s a huge spectrum of views about how quickly electric vehicles will be adopted. It has a fairly conservative view that electric vehicles will have a 9% market share in Europe by 2025, against rather wilder predictions of up to 25% penetration.
It is also locked in a race with rivals, principally Umicore and BASF, to commercialise cathode technology. On Friday, its shares were driven 4.3% lower by Umicore of Belgium’s revelation that it had raised €892m (£790m) via a share placing to accelerate its battery business. Investors fret that Johnson Matthey is falling behind in the race. That left the shares trading at £31.10, valuing the group at £6.3bn.
Yet even if it manages to grab only 10% of that market, analysts at Berenberg reckon it could be sitting on a £600m subdivision. Whatever happens, electric vehicles will not replace the combustion engine outright any time soon. Car makers have yet to work out how to make a profit on them. Until then, hybrid vehicles running on both electricity and fossil fuels will form the bridge to an all-electric future.
Johnson Matthey’s catalytic expertise and growing battery plans give it a foot in both camps. Buy.
