BofA ML upgrades Johnson Matthey to 'buy'

27th Nov 2023 10:26

(Sharecast News) - Bank of America Merrill Lynch upgraded Johnson Matthey on Monday to 'buy' from 'underperform' and hiked the price target to 2,000p from 1,600p as it argued the company has a far better cash flow profile than its valuation discounts.

"We believe Johnson Matthey (MAT) can extract more value than we previously thought from its Clean Air franchise thanks to management's cost cutting efforts," BofA said.

"We also see encouraging signs that it can generate new revenue streams in its Catalyst Tech business."

The bank said its "deep dive" into sustainable aviation fuels (SAF) points to a £2.6bn addressable market for JMAT by 2030.

"Regulation is pushing airlines to use biofuels, with the EU mandating a 6% blend and the US targeting 10% by 2030," it said. "Crucially, capturing this opportunity will require only modest capex (unlike batteries) given a licencing business model, and its existing expertise in syngas (lower reinvestment risk)."

Bank of America said JMAT's technology looks credible given nine sustainable fuel contract wins with partners/customers including BP and Linde, and a pipeline of 100 more projects.

"Delivering on these should accelerate profit growth, given the high margin on licensing. So, while Catalyst Tech is just circa 15% of group EBIT, we think profits could triple by 2030E, offsetting the decline of legacy businesses Clean Air and PGMs that faced headwinds from EV adoption."

The bank also noted that management is "getting serious" about squeezing costs.

"Management's cultural shift in accepting the fate of the legacy business is benefitting margins," it said.

"Early signs of success are the upgrade to underlying EBIT growth for this year as cost savings are realised. More is likely to come: the new CFO is confident of exceeding the £150mn savings target and sees significantly more to extract from Clean Air."

BofA said the market is understandably concerned about a core business in structural decline and reinvestment risk, indicated by the significant share de-rating in recent years.

However, it said recent results revealed upside to cost cutting targets, capital discipline in scaling back hydrogen capex, and a collection of Catalyst Tech awards.

"We thus see cheap optionality in the shares as management's strategy gains traction," it said.

At 1250 GMT, the shares were up 3.5% at 1,599.50p.