Real world requires an impairment

The cosiness of the ‘adjusted world’ takes a chilly breath when a business has to be restructured and/or an impairment is required. The shift from combustion engines to EVs has taken its toll and lower precious metal prices are weighing on profitability. The optimism regarding a better H2 stems from higher sales prices and cost-cutting measures. The H1 figures were broadly in line with our expectations (sales: -0.6%; EBIT: +1.3% – consensus sales: +2.6%; EBIT: -29.7%; adjusted EBIT: -6.0%).

Headwinds summed up

JMAT’s weaker adjusted profitability stemmed from lower pgm prices (to a certain extent from lower volatility), overall cost inflation and lower utilization in PGM Services and Clean Air. Looking at the outlook, investors may have been hoping for stronger growth and a higher dividend but this was certainly not the story conveyed by the management during the analyst presentation.

Management optimism on H2

JMAT’s figures were a mixed bag but, between the lines, one could read some scepticism regarding the coming months. To recoup profitability, the company needs to successfully raise sales prices, which is a challenge especially in the five-year-framework with car manufacturers. The management was very confident that profitability will pickup in H2. The H1 figures did not fully meet consensus expectations (sales: -11.7%; adjusted EBIT: +1.8%).

New brooms sweep well

JMAT’s new cost savings programme didn’t come totally out of the blue. The beginning of a term is the best time to do this kind of thing. In addition, the updated business strategy looks quite compelling but reminds us of the approach to cross-divisional fertilisation Mr Condon’s previous company had tried to implement with limited success. The FY guidance doesn’t look that ambitious at first sight, but we see the challenges in the details and the business environment.

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Empire Metals* (EEE LN) – Acquisition of three highly-prospective copper-gold projects in Australia Hummingbird Resources (HUM LN) – Kouroussa development update Johnson Matthey (JMAT LN) – £400m awarded by UK government for hydrogen research Keras Resources* (KRS LN) – Keras consolidated stake to full ownership of Diamond Creek phosphate mine Savannah Resources* (SAV LN) – FY21 results: well capitalised, DIA expected over coming months

The reality check

The H1 results were a bit of a double check. First, how high hopes (battery materials) persist in a rapidly changing environment, something already communicated to the markets. The second, and a rather annoying one, was how to deal with the issues as management was not really transparent. This explains the strong miss in EBIT compared to the consensus. We were also wrong-footed as our impairment figure was far too low.

Postponed rush effect

JMAT seems not to have participated fully from the ‘rhodium effect’ as it seems to have played out to a lesser extent compared to the company’s pgm competitors. We understand that JMAT’s management took the opportunity to accelerate its steps to deliver on its targets ahead plan but could not deliver on our profitability expectations. Consensus was beaten at the adjusted EBIT level (+2.2%) but there was a shortfall at the EBIT level (-16.8%).

Finally, a good ending

JMAT has introduced a new format called a ‘pre-close trading update’ just a few days after the financial year end. It looks like something between preliminary figures and consensus, strongly referring to the latter and being accompanied by some lengthy writing. We are still struggling with the point of it. However, the key message of the update was: 2020 was not so bad and figures should be expected at the upper end of market expectations. This would also be above our expectations.

Strongly betting on some kind of recovery

JMAT’s management guides for a ‘materially’ better second half compared to the first half of this (business) year. We assume this is based on the current pick-up in demand, which was seen in the chemicals industry and might go away in early 2021. Reported profitability was below our already cautious expectations and missed consensus by -43%, primarily due to an impairment and higher than expected restructuring costs to become a more agile company.

A proxy for automotives' future?

JMAT’s preliminary FY results might give a first indication of future (car) volumes and some perspectives on the developments in the battery materials business. The ‘preparation’ of the company erased c.-25% of EBIT. The justification therefore looks to us rather disconnected to the presentation by the company as management also swung into the line of companies unable to provide a 2020 guidance. FY profitability was below both our and consensus estimates: (reported £388m; AV: £477m, consensus:

Battery materials' position of points

JMAT’s H1 results were positively impacted by the good demand for car and truck catalysts, but profitability suffered. The top-line of New Markets was helped by the strong demand for battery materials, but profitability suffered from the investments in the next generation battery material eLNO, which came in more pronounced than expected. Due to the good performance in all other divisions, JMAT’s figures were a notch higher than expected from us, but consensus was met.

Crisis? What crisis?

JMAT’s preliminary FY figures were surprisingly strong as Clean Air, highly linked to vehicle production, generated higher sales and profitability. The division enlarged its share in European light duty diesel cars to c.65% and outpaced the local production in sales terms (incl. higher pgm prices). Efficient Natural Resources also made a strong contribution to profitability. JMAT’s FY figures were above our expectations, but broadly in-line with consensus.

Pulling the load

JMAT reported quite a good set of H1 figures with a higher than expected profitability. However, the single divisions gave a mixed picture of which Clean Air and Efficient Natural Resources made the pace on the profitability level. Despite management’s confirmation of FY guidance, we see some risks approaching (e.g. the consequences of UK’s exit from the EU, trade wars), which could make the business more challenging.

Endless restructuring and no end in sight

JMAT reported preliminary FY figures, which were burdened by a set of negative effects (legal proceedings and restructuring-related issues), which were more than our expectations. Bearing in mind the amount of these effects (£-140m), the explanations look insufficient. Consequently, our profitability expectations were clearly missed, in contrast to the top-line which matched them. We have the impression that management rather likes to present the company’s performance in ‘underlying view’ and

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