Johnson Matthey PLC (LSE:JMAT)'s has a far better cah flow profile than its valuation indicates, according to analysts at Bank of America.
The bank has upgraded the firm, which was recently demoted to the FTSE 250, to 'buy' and increased its price target to 2,000p from 1,600p.
The investment bank believes the company can extract more value than it previously thought from its Clean Air franchise thanks to management's cost-cutting efforts.
It also sees encouraging signs that it can generate new revenue streams in its Catalyst Tech business.
BofA said a deep dive into sustainable aviation fuels (SAF) points to a large (£2.6 billion) addressable market for the firm by 2030.
The bank pointed out regulation is pushing airlines to use biofuels, with the EU mandating a 6% blend and the US targeting 10% by 2030.
Crucially, capturing this opportunity will require only modest capex (unlike batteries), given a licensing business model and its existing expertise in syngas, the bank explained.
As a result, BofA thinks the company has a far better cash flow profile than its valuation discounts.
The market is understandably concerned about a core business in structural decline and reinvestment risk, indicated by the significant share de-rating in recent years, BofA accepts.
But, the broker pointed out recent results revealed upside to cost-cutting targets, capital discipline in scaling back hydrogen capex, and a collection of Catalyst Tech awards.
Shares are 3.9% to the good at 1,608.50p.