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Johnson Matthey warns of dent to profits as auto demand hit by coronavirus

On the bright side, the chemicals group revealed that operations in China were bouncing back after the coronavirus lockdown there

Johnson Matthey PLC -

Johnson Matthey PLC (LON:JMAT) said it has closed almost all of its catalytic converter factories due to coronavirus but reassured that it had a strong balance sheet and good access to liquidity.

An impact of around £50mln is currently expected on operating profits as coronavirus has led to reduced demand in its Clean Air division and around £20mln of delayed shipments, the company warned.

Factories have been closed as car manufacturers shutter their own manufacturing facilities because of governments’ preventative measures or lower consumer demand, with the exception is China, where operations are now “ramping back up” after shutdown measures to dampen down the virus.

The FTSE 100 chemicals group said trading had been on track with market expectations this year before the developments with Covid-19.

Overall liquidity available to the group stands at around £1bn, the company said, of which roughly £250mln of cash, £600mln still undrawn from a £1bn credit facility and about £130mln available under other committed facilities.

As well as no material refinancing due in 2020 or 2021, the debt leverage ratio to underlying profits is “well within” borrowing covenant levels. 

“Substantial progress” has also been made in managing precious metal working capital against a backdrop of rising platinum group metal (PGM) prices, with volume reductions of £200mln, while the company also pointed out that 75% of costs in Clean Air are variable.

Management declined to provide earnings guidance nor give any announcement about the dividend, though looking beyond the current environment said its “leading market positions, strong technology offering, and operational and investment discipline” left it confident in the medium term.

JMAT shares rose 3% to 1,812.5p on Monday morning.

Anaysts at UBS said assuming one month's disruption in Clean Air was a negative £30m impact on underlying profit “then on a linear basis this would clearly impact the group by -£360m on a full year basis”, before considering production recovery potential and mitigating cost measures. 

The impact onto a material balance sheet leverage was “the bigger disappointment, in our view”, the analysts said, with the statement suggesting net debt was £1.47bn, only a modest improvement on the level of September and well above consensus forecasts of £1.38bn.

“Without any improvement from working capital from this point (unlikely) the net debt to EBITDA on our recession model would increase to 2.7x. That said our liquidity analysis last week suggests that JMAT has at least 17 months of coverage of fixed costs via its current access to cash on hand and undrawn credit.”

Broker Liberum, on the other hand felt the message on debt leverage was “reassuring” in the face of a second half rise in PGM prices that, all else being equal, would normally inflate autocatalyst working capital values.

The Liberum analysts said: “One area that is not mentioned but is an important point is that 2009 was the best year for free cashflow generation for a decade as lower catalyst production and lower PGM prices for the metals used in those products released [working apital] and we see no reason that will not be the case this time.”

While there was no announcement about the dividend, the analysts said they “think this will likely be suspended".

   -- Adds share price and broker comment -- 

Quick facts: Johnson Matthey PLC

Price: 2113 GBX

LSE:JMAT
Market: LSE
Market Cap: £4.09 billion
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