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Morningstar | Johnson Matthey Stock Recovers From Pre-Earnings Jitters With Solid 1H Results; Fairly Valued

Johnson Matthey shares were up 8% at the time of writing after the company reported solid first-half results. First-half underlying operating profit of GBP 271 million was in line with consensus and our expectations. While the share price reaction looks overly dramatic given in-line profits, the stock has only recovered from its decline in the last few days as general market sentiment has grown increasingly bearish, particularly for companies leveraged to the auto sector like Johnson Matthey. This quarter, chemical companies with exposure to the auto sector have reported softening demand from China and issues from the new emission standards enacted in Europe in September. Johnson Matthey reported that the impact from the new emission standards was not material. However, the company did see a slowdown in China in both light-duty and heavy-duty catalysts. Sales of Chinese heavy-duty catalysts were down 10%, in line with the market, after two years of high demand driven by loading limit legislation. We don’t expect to make a material change to our GBX 3,200 fair value estimate. At current levels, the shares look fairly valued.

The clean air segment remains the key driver of near-term results. Underlying operating profit was up 15% over 2017, slightly better than our expectations. Performance in both light-duty and heavy-duty was strong. Sales of European light-duty diesel catalysts were up 18%, well above industry production, which fell 6% during the same period. Johnson Matthey’s market share in European light-duty diesel increased to 60% in the first half, ahead of our expectations. On the other hand, expected market share gains in European light-duty gas catalysts are now looking doubtful, but this has a much smaller impact on profitability. Outperformance in heavy-duty catalysts continues to be driven by Class 8 trucks in the United States. High production levels in this market are now expected to continue until mid-2019.

In the long term, Johnson Matthey is banking on the battery materials business. Nothing particularly significant was revealed in the report regarding progress of this business. The company reported that customer feedback on its eLNO material continues to be positive, and in July, the board approved the initial investment for its first commercial plant.