Investors may be overlooking a large opportunity for a trade, if they dismiss Johnson Matthey PLC (LSE:JMAT) as “an autocatalyst business with an end date”, that’s according to analysts at Deutsche Bank.
The maker of catalytic converters – for those unfamiliar with the underside of a car, its an essential bit of kit that changes toxic exhaust gasses from diesel engines into somewhat less harmful vapours – is today upgraded to ‘Buy’ from ‘Hold’ at the German bank.
Johnson Matthey established a market-leading position in the catalytic converter business, though such products can only remain relevant for as long as diesel engines are, and, with the market’s seemingly rapid transition to electric vehicles, many see the clock ticking for the London-listed company.
However, new management can “unlock significant value”, according to DB analyst Tristan Lamotte, who points to either a ‘pivot’ or a break-up and sell-off of the British industrial firm as catalysts to create shareholder value.
A trade in the FTSE 100 constituent likely offers a “win-win” scenario, Lamotte said in a note, as he reckons a break-up could realise up to 3,500p per share of value, if the proposed re-invention of the JMAT business fails.
Hydrogen is among the focal points as Johnson Matthey seeks to transition itself, as is the development of components for ‘zero-emission fuel cells’ and other opportunities focussing the so called ‘circular economy’, albeit after the company bailed on a battery venture (selling the business unit in 2021).
Confidence may be muted among investors.
DB’s Lamotte, meanwhile, reckons that the autocatalyst business still retains “substantial continued value”.
Looking to the pivot, he adds: “There is significant unrecognised potential in catalysts and hydrogen which can drive growth/reinvention”, while noting that the company targets larger earnings (EBIT) from growth businesses, by the early 2030s, compared to today’s current business mix.
The high price of platinum group metals, key ingredients in making catalytic converters, is another concern for investors as it erodes earnings.
DB forecasts anticipate it could be a 1% to 17% dent to earnings per share for 2024-25, though further out it predicts better (by 8% to 12%) EPS for 2026-2027.
At the current share price level the London-listed equity is too cheap (6.8x EV/EBITDA), the bank added.
Pitching a new price target at 2,500p, the ‘buy’ rating envisages some 40% upside to the current price, of around 1,775p.