Liam Condon, the new chief executive of Johnson Matthey, is obviously a superb salesman. The initial response to the company’s announcement of a £217 million annual loss and strategy update last week was to knock 248p, or 10.5 per cent, off the share price. But after the analysts’ Q&A session with Condon, they returned yesterday with “buy” recommendations and raised targets for the shares.
Their second thoughts were understandable. Johnson is a complex business with many moving parts, compounded by the volatility inherent in operations relying on metals and minerals.
For 50 years Johnson has been best known for catalytic converters, which turn exhaust fumes into carbon dioxide. But with batteries going to kill off the internal combustion engine, Johnson had to reinvent itself. The obvious answer was batteries, but late in the day it found that was going to cost billions. It pulled out and the previous chief executive quit. The loss for the year to the end of March was mainly caused by the consequent write-offs.
Enter Condon from Bayer, the German drugs and agriculture group, on March 1 armed with a plan. Johnson has been simplified, committees turned into teams and goals set. “We are committed to moving at pace,” Condon said.
The thrust will be to lead the march towards net-zero carbon emissions. Johnson will stick to its expertise in platinum group metals, which were the basis of its catalytic converters, though those skills will be directed to promoting clean air, decarbonising chemicals, transport and energy and moving into the production of ammonia, hydrogen and methanol. This maintains the group’s links with vehicle makers while giving it a platform from which to sign new clients and for cross-selling.
Aside from the unavoidable exposure to metals markets, this will make Johnson more vulnerable than most to supply chain problems, especially since it will be drawing more raw materials from China. It is also aiming to pivot its customer profile to that country and away from Europe and America in percentage terms.
The new strategy comes at a cost. While the company generates plenty of cash, it will need £300 million a year in capital spending to gear up production, particularly in hydrogen. That should be found without help.
So the company faces a delicate balance as it makes the transition to its intended mix of operations. It may be that the new management ends up doing the hard work of simplifying and remoulding, only to find that it has merely made it that much more attractive to a predator.
Standard Industries, an American company, has taken a 5.2 per cent stake in Johnson, a possible starting point for a full-scale assault. Yet the stake is also small enough to leave room for an auction to develop. Johnson would be a rare chance for a bigger combine to take a key position in this corner of the diversified chemicals sector. It is the world’s largest recycler of platinum group metals.
Thanks to capital spending, Sebastian Bray, an analyst at Berenberg, recommends Johnson shares while predicting that profits will decline for three years. Stripping out write-offs, he thinks the price-earnings ratio will fall from 12.1 to 11.3 this year, but will rise to 12.4 for the year ending on March 31, 2025. The dividend yield may rise from 3 per cent to 3.9 per cent. To achieve that, much will have to go right, but the company gives the impression of being able to cope with setbacks. “We will focus where we can win,” Condon said, “and if not, get out.” That seems an appropriate stance.
The shares were as high as £37 only four years ago. They have the potential to climb above £30 again in the medium term.
ADVICE Buy
WHY While not risk-free, the new management makes a persuasive case for its fresh strategy, which also raises takeover possibilities
Auto Trader
This column rated Auto Trader shares a “buy” last June at 40p above their present level. But even though the pandemic mercifully has abated, nobody then predicted the extent of disrupted supply chains, inflation and military conflict. In that light, the shares have been resilient and paid an 8.2p dividend for the year to March 31.
Ignoring the freakish 2020-21, the latest numbers compare promisingly with two years ago, when Covid was beginning to make an impact. Revenue was £432.7 million, up 17 per cent on 2019-20, pre-tax profit was £301 million, up 20 per cent, and basic earnings per share were 15 per cent higher at 25.61p.
The company’s name is a slight misnomer, since it does not itself trade vehicles. Instead, it charges retailers and private owners to put their wares on its website. As its revenue is not tied to the value of the transaction, volume is vital. The virtual showroom recently boasted 445,353 vehicles, equal to a quarter of predicted British factory production this year.
Nathan Coe, the chief executive, clings to the mantras that “car buyers do not treat it as a discretionary spend” and “cars cannot disappear”.
A shortage of semiconductors is inhibiting car owners from trading up and selling their existing motors. “The supply chain issues and component shortages dogging the car industry are now likely to last into the first half of 2023 as the conflict in Ukraine exacerbates post-pandemic upheavals for manufacturers,” Ian Plummer, Auto Trader’s commercial director, said.
There is no doubt that the company faces headwinds this year, reflected in the shares’ fall from 740p since December 31 to about 590p now, and that may have further to go. But the long-term investment case is still sound.
Numis has upgraded its forecasts, hailing “a strong set of 2022 results that have come in ahead of both our and consensus estimates”. The broker estimates 27.6p earnings per share for the year just begun, which would put the shares on a reasonable price-earnings ratio of 20.9.
ADVICE Hold
WHY Strongly placed to withstand a challenging year
