Speciality chemicals company Johnson Matthey (LSE: JMAT) dropped into the FTSE 250 on 18 September last year and has shown little sign of fighting its way back into the blue-chip index. Its shares are down 11.83% over the last year, and 51.54% over five years.
Founded in 1817, many expected Johnson Matthey to benefit from the shift to sustainable technologies. As well as catalytic converters it invests in clean energy projects, including hydrogen fuel, attracting the attentions of ESG (environmental, social and corporate governance) investors.
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Can the share price rebound?
The ESG trend became stretched and the sector gave up its gains as higher interest rates drove up borrowing costs. Falling platinum prices hit Johnson Matthey’s headline profitability.
Yet investing is cyclical, and a number of factors that have worked against the group may now be swinging back in its favour.
The obvious one is that its shares are a lot cheaper than they were. Today, they trade at just 9.83 times earnings, alerting bargain hunters like me.
Like many struggling companies, the board has been looking to cut costs. Preliminary results for the year to 31 March showed that its transformation programme delivered around £75m of cost savings, smashing its £55m target. The board has set itself the ambitious target of saving £200m this year, as it simplifies the business.
Johnson Matthey is selling off non-core businesses to focus on the global energy transition through its core precious metals and catalysing technologies operations. It will use some of proceeds to trim net debt, which it cut to £951m in 2025. That’s still relatively high though, given today’s reduced market cap of £2.36bn.
The stock offers an eye-catching trailing yield of 5.56%. The board has a decent track record of maintaining dividends, as this chart shows, pandemic not withstanding.
Chart by TradingView
Yet there’s no getting away from the fact that the high yield is partly down to the underperforming share price.
I think this share still has some way to go
The Johnson Matthews share price took another hit on 27 November, when first-half results showed reported revenues down 14% to £5.6bn, blamed on the “challenging” macroeconomic backdrop. Underlying operating profits fell 4% to £154m.
CEO Liam Condon praised its “resilient performance” and maintained full-year guidance, pinning his hopes on a strong second half. But will he get it?
I’m not convinced. Falling interest rates fall should make funding the net zero transition easier but we may not get them. Inflation could pick up in 2025, as the UK budget drive up business costs president-elect Donald Trump stokes the US economy. Trump’s plan to boost fossil fuels and cut ESG subsidies won’t help.
The 11 analysts offering one-year share price forecasts for the stock have set a median target of 1,762p. If correct, that’s up an impressive 27.15% from today. Of 12 stock ratings, four say a Strong Buy and eight say Hold. None say Sell, which I totally get. Few would want to crystallise their losses at today’s price.
The shares should rebound at some point but I think conditions are too challenging for me to buy it today. I’m watching it though.
