Automotive Electrification Will Shrink Clean Air Business Margins

Key Takeaways

• Retreat from battery materials and key divestitures narrows growth opportunities, increasing reliance on declining markets vulnerable to structural changes.
  
• Heightened competition, regulatory pressure, and volatile precious metals pricing threaten margins, earnings stability, and long-term cash flow consistency.
  
• Delayed ICE decline, new refinery, operational improvements, and secured contracts support stable margins and revenues, while expansion into new markets offers diversification and resilience.

Catalysts

Engages in the clean air, catalyst and hydrogen technology, and platinum group metals (PGM) service businesses in the United Kingdom, Germany, rest of Europe, the United States, rest of North America, China, rest of Asia, and internationally.

• The accelerating global electrification of vehicles and ongoing decline of internal combustion engines is set to erode Johnson Matthey's core Clean Air business, directly reducing both revenues and long-term operating leverage as auto catalyst demand contracts faster than modeled, especially beyond 2030.
  
• Intensifying competition from low-cost Asian players in battery materials and precious metals, particularly as Johnson Matthey lacks scale in these emerging sectors after its retreat from eLNO and battery materials, will pressure both prices and market share, threatening both top line growth and profit margins over the next decade.
  
• The company's strategic retreat-exiting high-growth areas like battery materials and now divesting Catalyst Technologies-signals a narrowing of its growth optionality and could further constrain future earnings growth, with portfolio concentration on legacy markets vulnerable to structural decline.
  
• Heavier dependence on precious metals for the refining and recycling business exposes Johnson Matthey to increased earnings volatility and gross margin compression during downcycles in metal prices, undermining both earnings resilience and consistency in free cash flow generation.
  
• Rising regulatory and public scrutiny on chemicals and materials manufacturing, plus investor and policy pressure for accelerated scope 1, 2, and 3 decarbonization investments, will translate into persistently higher compliance and capital costs, eating into operating margins and diminishing returns on capital through the next investment cycle.

Johnson Matthey Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Johnson Matthey compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Johnson Matthey's revenue will decrease by 44.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.2% today to 7.4% in 3 years time.
• The bearish analysts expect earnings to reach £143.9 million (and earnings per share of £1.18) by about July 2028, down from £373.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.4x on those 2028 earnings, up from 8.3x today. This future PE is lower than the current PE for the GB Chemicals industry at 21.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.45%, as per the Simply Wall St company report.

Johnson Matthey Future Earnings Per Share Growth

Risks

• The sunset for Clean Air and ICE catalyst business is much further out than previously anticipated, due to stronger-than-expected long-term demand for hybrid and heavy-duty vehicles, which supports resilient sales and operating margins well into the 2030s. This more gradual decline in ICE supports long-term revenue stability.
  
• The new world-class PGM refinery will not only boost capacity and efficiency but also unlock substantial working capital and cash flow improvements as older operational bottlenecks are addressed, contributing to a step change in free cash generation and improving net margins.
  
• The company has delivered and is targeting significant operational improvements, cost reductions, and streamlined overheads, which have already resulted in rising operating margins in both core businesses and are expected to drive sustainable increases in earnings.
  
• Long-term contracts and strategic partnerships-particularly in Clean Air and PGMs-underpin high visibility to future revenues, with management stating that over 90% of targeted Clean Air sales through 2028 are already secured, reducing top-line risk.
  
• Additional growth optionality exists at little incremental capital cost due to established capabilities in higher-value PGM applications (pharma, renewables, industrial), Clean Air solutions for non-automotive markets, and hydrogen technologies, suggesting potential for revenue diversification and enhanced cash flow resilience.

Valuation

• The assumed bearish price target for Johnson Matthey is £13.77, which represents two standard deviations below the consensus price target of £18.94. This valuation is based on what can be assumed as the expectations of Johnson Matthey's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £22.9, and the most bearish reporting a price target of just £13.4.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £2.0 billion, earnings will come to £143.9 million, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 8.5%.
• Given the current share price of £18.47, the bearish analyst price target of £13.77 is 34.2% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.