Johnson Matthey PLC’s (LON:JMAT) capital intensity is growing at a time of fragility in auto and truck markets globally, UBS analysts said after the company posted its full-year results.
The group, which makes catalytic converters for a third of the world’s cars, reported a 53% jump in pre-tax profit to £488mln for the year to the end of March 2019 and a 5% rise in revenue to £10.7mln.
READ: Johnson Matthey doubles down on electric ambitions as it strikes two key deals
However, the results were inflated by sales of precious metals such as platinum and palladium that the company uses in its production processes.
The company also suffered a cash outflow of £13mln, largely due to higher precious metal working capital related to downtime at one of its platinum refineries during the first half.
The increase in precious metal working capital dragged the return on invested capital down to 16.4% from 17.0%.
UBS repeated a ‘sell’ rating on the stock with a target price of 2,850p, citing “capital intensity”.
Johnson Matthey's capital expenditure came to £323mln in 2019 as it invested in developing a new type of battery material called eLNO in the hopes of tapping into the growing electric vehicles market. The move comes in response to declining car sales and lower demand for diesel.
The group has secured its first commercial manufacturing plant for eLNO and a long-term supply agreement for raw materials with Nemaska Lithium.
The plant is on track to start production in fiscal year 2021/22 and to supply platforms in production the following year.
Johnson Matthey also spent money on expanding manufacturing capacity for its Clean Air business, which makes pollution-reducing catalytic convertors.
Clean Air accounted for 65% in total revenue last year. It delivered 11% growth in revenue, boosted by tighter emissions regulation in Europe, but this marked a slowdown on the 25% rise reported in 2018.
“We see return on capital employed fading materially given a slowdown in Clean Air and the 'greenfield' expansion into battery materials,” UBS said.
For the 2020 financial year, Johnson Matthey expects capital expenditure to rise to £500mln as it continues to invest in eLNO, new plants for Clean Air and upgrades to IT systems.