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TEMPUS

Cleaner air is catalyst for conversion

The Times

The car market stands to do well as the coronavirus vaccinations rollout around the world and people exorcise their lockdown demons with day trips and beyond. While that should be good for this year’s sales of new and second-hand vehicles, there may be longer-term value in companies such as Johnson Matthey that invest in cleaner cars and better batteries.

Johnson Matthey
Market cap £6bn | Revenue £14.6bn | Underlying op profit £539m

The soaring price of platinum, a key element in cars’ catalytic converters, has drawn thieves and, accordingly, replacement orders at Johnson Matthey, one of the leading producers.

Happily, the FTSE 100 company has a lot more going for it than criminal activity. The converters play into the environmental vibe, extracting carbon monoxide, nitric oxide, nitrogen dioxide and hydrocarbons from car exhausts, but their long-term outlook will be restricted as the world shifts to electric vehicles.

Alert to this, Johnson Matthey is switching its emphasis to clean air, minerals conservation and pharmaceutical ingredients. At the leading edge, it is researching battery materials and fuel cells for transport, healthcare, energy and chemicals.

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Robert Macleod, chief executive, said: “We have an important role to play in helping society address climate change through sustainable technologies, and we remain focused on commercialising these and delivering our growth ambitions.”

While Johnson was not entirely unaffected by the pandemic, in the second half of the financial year it gained from stronger than expected global car production, particularly in China, where government stimulus helped demand and firms there restocked. The strong platinum price gave Johnson a profits windfall and kept its metals refineries busy.

Johnson’s health division is building credibility with more contracts to supply active pharmaceutical ingredients for opioid addiction therapies and an immuno-oncology drug linker.

It is conducting a strategic review of the health business to identify the biggest growth opportunities. “[This] could result in unlocking significant value for the group,” said Jaroslaw Pominkiewicz, an analyst at Jefferies, the broker. “We value it at about £2 billion. Expect meaningful upgrades for this year and next and a strong positive share price response.”

Sales of fuel cells are expected to have grown by a fifth in the past year, having doubled manufacturing capacity in the UK and China. More capacity is being added.

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Johnson is hopeful that it can finally start to turn a penny on its high nickel cathode material, branded as eLNO, on which hopes have been pinned for several years. A first commercial plant is on schedule and there are plans for a second. But serious contributions to profit are a few years away.

With an estimated £60 million in cost cuts dropping through to the bottom line, the management is nodding towards the upper end of analysts’ forecasts, suggesting only a modest decline in annual profits from £539 million to about £500 million for the year to March 31.

The group expects further recovery in the year just started, including seeing orders growing for the heaviest US trucks.

While it is hard to see too many bumps in the road ahead at this stage, there certainly will be some when a company is operating in so many innovative areas. But Johnson has a well-established management culture that should prevent it becoming too carried away.

The shares have been strong for a year. From a Covid-19 low of £16.83, they rose in virtually a straight line to reach £33 last month. The dividend offers a yield of 3.1 per cent covered 2.38 times.

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Advice Buy
Why Despite a strong run, the shares are good value and the company’s green story has further to go

Lookers, Motorpoint
Lookers market cap £244m | Annual revenue £4.79bn

“Profit mis-statements” and “potentially fraudulent transactions” were two phrases thankfully absent from Lookers’ first-quarter trading update. The stock market signalled its gratitude by sending the share price up 14 per cent to 71p, near the year’s high.

In July the quote had been suspended at a miserable 21p as fraud came to light, leading to a £45.5 million pre-tax loss for 2019 and the departure of Deloitte, the auditor.

But since share dealings resumed at 39p in January buyers have been out in force, buoyed by post-pandemic prospects and, more immediately, the reopening of car showrooms on Monday.

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After a quiet January and February, the Society of Motor Manufacturers and Traders recorded a jump of 11.5 per cent in March car sales as the open road beckons once more.

Mark Raban, chief executive of Lookers, said: “The events of the last year have highlighted the inherent strength of our franchised dealership model and the importance of an integrated customer experience which fully embraces both digital and physical channels.”

Between lockdowns, the company has taken advantage of the growing preference for private over public transport to sell more new and second-hand cars, and developed its online operation into the bargain.

It has been a similar story at Motorpoint, also reporting yesterday, which specialises in the second-hand car market. Both will have been looking over their shoulders at the looming threat from Cazoo, and have upgraded their offers accordingly with more emphasis on after-sales service and post-purchase cooling-off periods.

While Lookers shares are a rising market, Motorpoint’s seem to be running out of steam. After hitting a peak of 322p in January, they have been on a steady decline.

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In contrast, as it puts its finances back on an even keel, Lookers is again correcting analysts’ predictions, this time of £22.6 million pre-tax profit for the year, saying it is likely to be “materially ahead” of that. In 2018 the comparable figure was £41.9 million, indicating the scope for progress.

Advice Hold Motorpoint, buy Lookers
Why Lookers has more recovery potential

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