Johnson Matthey: Turning a Melting Ice Cube into a Cash-Flow Machine
After 200 years of refining precious metals, Johnson Matthey is finally refining itself…
The lesson from the past few years is clear: in a fragmenting world, supply chain independence isn't just a strategy, it's a necessity. We learned it with energy, and we're relearning it with every critical technology. Yet, the market has punished the one company that sits at the very heart of this new reality.
For seven years, Johnson Matthey has been forgotten by the investment community. A new CEO and a public letter from an activist investor in December 2024 finally forced a change. Now, a company that spent 200 years perfecting the art of refining is attempting to refine itself. The market sees a melting ice cube, I see an inflection point.
Get yourself a cup of coffee ☕️ and enjoy this breakdown of one of the most important companies in the West.
1.0| Overview & Business description
Founded in 1817, Johnson Matthey (JM) is a UK based specialist for PGMs and producer of catalytic converters. The company has a market cap of £2.96 billion and four business divisions:
Clean Air
PGM Services
Catalyst Technologies
Hydrogen Technologies
[Johnson Matthey's financial year ends on March 31st. For clarity, this report will refer to the financial year ending March 31, 2025, as FY25.]
1.1 | PGM Services
The core of the company is the PGM Services division, which provides the rest of the group with a reliable supply of PGMs. JM is not a PGM miner, but rather a refiner and market-maker. The company runs a refinery in the UK that forms the core of the group’s refining capabilities. Today, nearly 60% of the global PGM supply derives from refining, enabling a circular economy.
As can be seen above, the total demand for PGMs in 2024 stood at 1,100 tonnes while supply stood at 1,070 tonnes. However, the main message of the graphic is that recycling can be broken down into open loop recycling and closed loop recycling. Closed-loop recycling is rarely considered in supply/demand statistics, but if we include it, global recycling supply amounts to 631 tonnes, or 59% of total global supply. JM is the largest secondary refiner of PGMs globally and refines ~20% of PGMs globally from primary + open loop recycling (so roughly 20% of the 580 tonnes figure).
The PGM Services division is also a market-maker for physical PGMs. Through its extensive decade long relationship with the largest suppliers of the industry, JM is able to provide its clients with a reliable PGM supply. At this point it also makes sense to point out that the market research team of JM is considered the best in the industry, with market participants even paying for their market research. The team of JM has access to a lot of data due to its position as a market maker and publishes a very insightful yearly PGM report that is well worth a read. The market making business has very high margins, even though it’s a small contributor to the group.
Lastly, PGM Services produces PGM-based chemicals for clients ranging from pharmaceutical giants like Pfizer, Bayer and Novartis to industrial leaders like Honeywell and Siemens.
1.2 | Clean Air
The foundation of JM is the PGM Services business. The main advantage of JM is the perfect integration between the Clean Air division and the other businesses. That division is simply the business of catalytic converters for ICEs. JM’s catalytic converters are primarily used in Heavy Duty Diesel’s (HDDs), Light Duty Diesel’s (LDDs) and Light Duty Gasoline’s (LDGs).
While the business is mainly focused on catalytic converters for cars, there are also use cases in Diesel generators used as backups for data centers and other applications. The main business, however, is the automotive market and that won’t change. While the outlook on ICEs has been bleak over the past few years, I believe that a lot of these fears are overblown. Yes, there is a trend towards EVs, however, we need to put things into context here. EV sales in Europe struggle because the market was mainly held up by subsidies, the global south is just gaining traction in terms of higher living standards and while China is the leader of EVs, even there the number of ICEs on the road will continue growing for the foreseeable future (on an absolute basis). While China ramps up its domestic EV sales, Chinese firms export cheap ICEs to Indonesia, Africa, etc. While people look at this business as a melting ice cube, I think it’s a very slowly melting ice cube at best. Actually, tighter regulation on emission standards increases the demand for catalytic converters, benefiting JM
Clean Air has a leading market position in catalytic converters, and will continue to play a significant role in the company’s future. Meanwhile, the forecast for the adoption of EVs has started to shift somewhat in recent years.
1.3 | Catalyst Technologies and Hydrogen Technologies
Catalyst Technologies is the growth driver for JM in recent years. Over the past 3 years, revenues have grown by 50% while operating margins doubled, resulting in a 200% growth in profitability. In its latest annual report, the company described the business operations better than I ever could.
"[We develop…] technically advanced solutions that create chemicals and fuels from fossil feedstocks, biomass, municipal solid waste, green hydrogen and captured carbon dioxide.
[…] We are working to decarbonise industry and be the partner of choice for future needs, be that using fossil fuels more efficiently or transitioning to alternative feedstocks."
One example of Catalyst Technologies leading market position is the strategic technology alliance between Honeywell, JM, GIDARA Energy and SAMSUNG E&A for the production of sustainable aviation fuel (SAF) from biomass and municipal solid waste. The alliance will streamline the entire SAF production chain from the feedstock to the final product.
While this division has been the growth driver for JM, the company announced the sale of the Catalyst Technologies business to Honeywell a couple months back. This is an exciting development for the entire group and will define the strategy going forward. But more on this later on in the article.
Due to its technical capabilities and network of customers and suppliers in the PGM industry, JM ventured into hydrogen. The current state of the hydrogen market and in general energy transition, however, is very rough. Most companies are loss-making and struggling to make a profit. JM is no exception in this regard, but has realized how difficult it is to scale in the current market environment. Therefore, the company has already announced significant CAPEX cuts for the hydrogen division and targets breakeven margins early next year.
2.0 | Harsh words from a frustrated investor
A look at the chart of JM (white) and one of its listed competitors, Umicore (red), reveals deeply negative returns over the past 7 years.
Since our focus is on JM, let’s break down some of the things that went wrong in the past, so we can better understand the actions taken today. Luckily for us, someone has already written a piece highlighting all the things they are frustrated about. That piece is a letter by activist investor Standard Investments, published in December 2024. The firm criticized the management team and blamed them for JM’s underperformance compared to the broad equity market. In the letter, Standard Investments goes on to lay out a couple of reasons for their frustration with the company’s development:
Significant CAPEX has been spent on unprofitable projects with no path to profitability.
Clean Air’s margins are underwhelming and below that of peers.
PGM Services have not contributed to cash flows due to high working capital.
Free cashflow generation has been underwhelming and volatile.
Furthermore, they recommend three steps to generate value for shareholders:
Replace the board of directors
De-risk or sell Hydrogen Technologies
Launch a formal, public strategic review process to maximize shareholder value (for example by selling off assets).
JM replied by listing the members of the board who joined the group recently while stating that they continue to be committed to create shareholder value.
[…] "JM is making progress in a challenging market environment through delivery of a comprehensive transformation strategy which includes significant manufacturing footprint consolidation in Clean Air, a generational upgrade in our PGM refining capabilities, significant cost reduction, the implementation of a global business services model and extensive organisational changes. In addition, we have made substantial commercial progress, winning new business across all our business areas that will drive future growth. We will continue to act with a strong sense of urgency as we adapt this strategy to the evolving market situation."
— Response to letter from Standard Investments dated 7th January 2025
The response was quite muted but actions always speak louder than words, and the company announced a couple months later the sale of Catalyst Technologies. In January, JM announced a new investment committee focused on capital allocation while chairman Patrick Thomas announced his resignation in February. At the same time, it was announced that JM’s CFO, Stephen Oxley, will resign and make room for Richard Pike. Since April, Richard Pike is CFO of Johnson Matthey.
3.0 | Value Creation in response to Standard Investments
I believe that JM has started a transformation into a company that will be more cash flow generative, less exposed to working capital changes and more rewarding to shareholders (via buybacks and dividends). Recent developments directly address the issues Standard Investments raised in its December letter
I would make the argument that this transformation began in 2022, when Liam Condon became CEO of the company. Coming from the German chemical and pharmaceutical giant Bayer, he immediately recognized JM as a complex organization that needed to refocus on its core. His mandate was simple: "focus where we can win and then play to win. And if we can't win, we get out." Within the first 87 days, he replaced half of the executive leadership team, signaling a new chapter for the company’s leadership.
"So, I think coming from Bayer, what was always what stuck in my mind really the importance of being very clear about your positioning in the market, this topic of focusing on your core competencies, market leadership positions, having competitive margins. […] I'm trying to bring that rigour, that we focus where we can win and then play to win. And if we can't win, we get out. If we're not the best owner, we got to sell, we got to divest, and we just got to focus on where we can really win."
— Liam Condon; Strategic Update & Results for Year ended 31st March 2022
3.1 | CAPEX reduction, especially in Hydrogen Technologies
It is true that the company spend a lot of money on the Battery Material division. They sold the division in 2021 for much less than they initially invested in. Standard Investments compares Battery Materials with Hydrogen Technologies, since the division is still loss making. JM has cut back on CAPEX for the division, started reducing costs and targets breakeven margins at the end of the year.
In FY2025, the underlying operating profit in Clean Air remained flat while PGM Services reported a 9% decline. Corporate stayed roughly unchanged. Catalyst Technologies reported 22.6% growth while Hydrogen Technologies reduced its underlying operating loss from £50 million to £39 million.
If we look at CAPEX, we can see a similar picture. The CAPEX of Clean Air, Corporate and Hydrogen Technologies declined, while PGM Services reported a step increase and CAPEX of Catalyst Technologies increased only slightly (relative to the growth of the business).
The high CAPEX of PGM Services is easily explained by the construction of the new 3CR refinery that will replace the existing refinery in Royston. The new refinery will be one of the most important developments in the company’s history and will impact cash flow generation tremendously. But more on this later.
Overall, CAPEX is declining across the group, apart from Catalyst Technologies (sold to Honeywell) and PGM services (construction of new refinery). The bottom line is that JM has drastically cut back on Hydrogen Technologies to prioritize cash flow over a cash burning business. While they still believe in the long term potential of the division, it is perfectly necessary to reduce costs and CAPEX in the current market environment.
3.2 | Clean Air Margin Improvements
The last 12 months have been rough for the global automotive industry, with significant stress on European automakers. Clean Air is obviously impacted by this, which can be seen in a 8% decline in sales on a FX adjusted basis. Light duty diesel and gasoline recorded only small declines, while heavy duty diesel (e.g. industrial applications such as trucks and construction machinery) declined significantly.
Nonetheless, Clean Air was able to grow its underlying operating profit on a FX adjusted basis by 3%. The underlying operating profit margin grew by 120bps from 10.6% to 11.8%. The majority of this margin increase was realized in H2 FY 2025, as the underlying operating profit margin went from 10.4% in H1 to 13.2% in H2.
For the FY2026, JM expects an underlying operating profit margin of 15-16% (in FY2023 the underlying operating profit margin stood at just 8.7%). This significant uplift in margins will be realized from the closure of production plants, a reduction in headcount and broadly more efficiency. Since the transformation began in 2022, the company has reduced the number of production plants from 16 to just 11 while cutting the number of production lines by half.
In its latest report on JM, Deutsche Bank commented on the margins of Clean Air:
"[Management targets] margin improvement to 16-18%. The margin is below Umicore's due to mix (light duty gasoline is higher margin). The targets imply growth to at least £320m in EBIT for Clean Air by FY28 (FY25: £273m). The company will streamline the business, including a 20% reduction in R&D and SG&A by the end of FY26, a 15% headcount reduction by the end of FY26, and a plant capacity reduction from 11 currently (with 22 lines)."
— Deutsche Numis Research
3.3 | Construction of a new refinery
One thing Standard Investments pointed out was the historically poor cash flow generation due to working capital constraints. Working capital was impacted by the old refinery in Royston. Due to the age of the plant, the refinery frequently experiences breakdowns which cause raw materials and unfinished goods to pile up. The excess inventory inflates the group’s working capital. At the current point in time JM is constructing a new refinery named „3rd century“ or in short 3CR, that will be able to handle 20% higher volumes, reduce working capital and improve the company’s free cash flow generation.
The 3CR refinery is set to replace the existing PGM refinery and will be built on top of the old car park of the existing site.
Construction on the 3CR refinery began in 2019 with the main contractor Kier Eastern, a construction company that generates yearly sales of ~£4 billion and is among the largest contractors to the UK government. The construction and demolition firm Careys conducted enabling works, including asbestos removal and the demolition of the "Western Building" in 2019 to make way for the new facility.
According to JM's management, the 3CR project is progressing on budget and is anticipated to be operational by early 2027. The transition from the old refinery to the new one will be gradual over a 22-month period to ensure continuous operation.
3.4 | Sale of Catalyst Technologies
In May 2025, JM announced the sale of Catalyst Technologies to Honeywell for the sum of £1.8 billion. At the time of the announcement, JM had a market cap of roughly £2.25 billion. Liam Condon made a very interesting remark on the transaction and valuation.
"I vividly recall three years ago, being asked when I joined, if I would be open and the company would be open to selling different parts of the business. And at the time I said I do firmly believe Johnson Matthey needs to focus a lot more. We need to do a better job of simplification, and we need to execute better. What has changed versus three years ago? […] There was interest even three years ago in somebody acquiring the Catalyst Technologies business. But the valuation that was on offer then was miniscule compared with today. And my answer three years ago was, there's no point in selling other parts of the portfolio because we will not get the value for them. […] The margins were actually too low and the growth trajectory was not on the right pathway. We've invested a lot in the past three years in fundamentally reshaping Johnson Matthey. […] We would have been lucky to get £400 million to £500 million for it."
The main reason for the higher valuation can be traced back to a terrific performance from the division in recent years. In the past 4 years, operating margins increased from 7% to 14% while revenues grew by 50%. Overall, operating profits grew 200% while the valuation for the deal implies an EV/EBITDA multiple of 13.
As always, when a company is about to be flooded with cash from a divestment, the main question is, what the management team will do with the cash. Will they waste it on M&A, return it to shareholders or just hoard cash on the balance sheet? In the case of JM, the company committed to return £1.4 billion to shareholders via dividends and/or buybacks. After accounting for advisory fees and taxes of ~£200 million, JM will receive £1.6 billion. Considering the current market cap, £1.4 billion in shareholder returns would imply ~50% of the market cap of JM.
Obviously, there are always approvals that bear the risk that the divestment will be rejected by authorities. Management team noted that there is virtually no overlap between the two businesses, so they expect regulatory approval to be straightforward. The divestment is expected to close in the first half of calendar year 2026.
4.0 | Financials and Outlook
Since we already looked at some of the financial statements in section 3.1, we will look at stuff such as the number of employees, the pro forma operating profit, revenue and CAPEX before lastly looking at the outlook for the RemainCo.
In order to achieve its long term objectives, JM has to become more efficient and focused. The headline number of employees fell by 13.15% over the financial year while only Corporate (HR for example) and Catalyst Technologies went up. The Value Businesses line is effectively a remaining stake, JM still owns of assets they divested in recent years (e.g. Medical Devices). If we look at the numbers, excluding the Value Businesses, the number of employees fell by 5.82%.
This headcount reduction resulted in a 9.52% decline in employee benefit costs (not adjusted for Value Businesses since there is no breakdown of these numbers). If we take the FY2025, the RemainCo generated ~£300 million in underlying operating profit and revenues of ~£2.8 billion (negatively impacted by FX).
CAPEX is at elevated levels of pro-forma £303 million due to the new 3CR refinery. JM guides for CAPEX to drop to close to maintenance levels of £120 to £140 million by calendar year 2027.
JM laid out its core targets till the end of the FY2028. These are assuming a slight slowdown in sales but an inflection of margins and a step reduction in CAPEX, leading to materially higher cash flows and dividends. Revenues for Clean Air are expected to be over £2 billion (90% of contracts already won), while revenues for PGM Services are expected to remain roughly flat at £450 million. The core driver of the group will be Clean Air‘s margin expansion from 10.8% (end 2024/2025) to a range between 16-18%. Margins for PGM Services should remain roughly flat at 30%. Overall, operating profit should grow to £350 million (after the Catalyst Technologies divestment) and due to a reduction in CAPEX, FCF is expected to grow significantly from £36 million (impacted by FX and high CAPEX) to £250 million, enabling JM to raise its yearly returns to shareholders from £130 million to £200 million. It is worth noting that these targets don’t assume any changes in macro, presenting potential upside, in case the automotive industry somewhat recovers.
5.0 | Balance Sheet, Liquidity and Capital Allocation
JM’s net debt stands at £799 million as of march 2025. Below we can see the debt maturity profile of the company.
The average interest rate of borrowings stands at 3.33% with a weighted average time till maturity of 4.2 years. Considering the inflection of margins, JM shouldn’t face problems servicing its debt. It’s also worth noting that management plans to return £1.4 billion of the £1.6 billion in proceeds from the Catalyst Technologies divestment to shareholders, leaving £200 million, that will reduce the net debt of the company.
"The group has a robust funding position comprising a range of long-term debt and a £1 billion five year committed revolving credit facility newly secured in April 2025 and maturing in April 2030. There was £874 million of cash held in money market funds or placed on deposit with highly rated banks. Of the existing loans, £260 million of term debt and £40 million of other bank loans maturing between August 2024 and June 2025 were re-financed in December 2024 when the group issued c.£300 million of loan notes in the USPP market."
The £1 billion revolving credit facility is untapped as of now, significantly reducing any near-term financial risk. Capital allocation is one of the most crucial topics when analyzing a company. The positive is that the management team has clearly stated its intentions, to return as much cash as possible to shareholders, once the 3CR refinery is operational. But make no mistake, in the meantime, the company will still return considerable amounts of cash to shareholders (unrelated to Catalyst Technologies!). The current yearly distributions stand at ~£130 million with the stated goal to raise these to at least £200 million from the FY2027 onwards.
In July 2024, JM announced a £250 million share buyback program financed by the divestment of the Medical Devices group. The program canceled 15.9 million shares and reduced the shares outstanding by 8.67%. The ROCE increased slightly from 11.9% to 12.1% in the financial year.
6.0 | Valuation and Risks
From a valuation standpoint, JM is trading at a cheap starting valuation, poised to re-rate once free cash flow generation begins to move closer to the £250m target. Because of Catalyst Technologies, we first have to understand how significant the valuation of the division is compared to the RemainCo. On the pie-chart to the left we can see the contribution to the groups underlying operating profit for Catalyst Technologies and Clean Air as well PGM Services. On the right hand side of the graphic, we can see what at what value the markets prescribes to the rest of the company, post Catalyst Technologies divestment.
While Catalyst Technologies only contributed 17.9% of group operating profit in FY25, the proceeds from the divestment will amount to 54.1% of the current market cap. That means that the market currently values Clean Air and PGM Services combined, at less than Catalyst Technologies. I excluded Hydrogen Technologies from the graphic, because the division isn’t at breakeven margins just yet, but realistically, the division is probably also worth a couple million pounds.
Post shareholder distributions, JM would have a market cap of roughly £1.5 billion. With pro forma EBIT of ~£300million, the company trades at 5x P/EBIT. Current net debt stands at £799 million, but with a £200 million contribution from the divestment, we are looking at net debt of ~£600 million after the closing of the deal. That would value the RemainCo at 7x EB/EBIT. This is too low for a business entering a period of higher margins and surging cash flows. The goal of £250 million FCF is definitely achievable and would value the company at a free cash flow yield of 17%, while the yearly shareholder distributions of £200 million equal a shareholder yield of 13.3% p.a.
Every investment thesis has risks, and this one is no exception. From my perspective, the main risks for JM are:
A potential further weakening of the global automotive market.
A potential refusal of the Catalyst Technologies sale to Honeywell.
The client concentration (especially in the PGM Services business).
The CEO‘s past at Bayer (both a risk and an opportunity).
While none of the previously stated targets by the company anticipate a recovery of the global automotive industry, a further weakening of the sector would clearly hit JM at its core. While I don’t anticipate further weakness, it’s a risk to be aware of. Secondly, a lot of the thesis is based on the closing of the Catalyst Technologies divestment. The deal still needs regulatory approval from several governments. In case the deal doesn’t go through, JM‘s share price would probably suffer in the short term. While Catalyst Technologies is a great company, we would all prefer a smooth divestment process.
On client concentration, the group relies on a few key players.
"The group received £1.6 billion of revenue from one external customer in the PGM Services business which represents c. 13% of the group's revenue from external customers during the year ended 31s March 2025. […]There were no other external customers which represented more than 10% of the group's revenue from external customers during the year ended 31st March 2025."
While I would prefer a more diversified client base, the situation does not seem highly dramatic as of now and I guess being the largest secondary refiner of PGMs globally, puts you in a position where you have some pretty large customers forming significant portions of your revenues and profits.
Lastly, I want to show how Liam Condon‘s past at Bayer is both an opportunity and a risk. While I already noted how he transformed the company in section 3.0, I would like to focus a bit more on his career at Bayer. Liam Condon was CEO of Bayer Crop Sciences and was one of the key executives behind the acquisition of Monsanto in 2016. In retrospect, the acquisition was the biggest failure in Bayer’s history. I don’t want to put all the blame on Liam, .I just want to highlight that even with the best intentions, things can go wrong. However, I also believe that having experienced the large and complex organization of Bayer, having experienced what can go wrong if one tries to reach for the stars, the management will avoid large M&A deals and focus on its core.
7.0 | Conclusion
In conclusion, JM is a 200+ years old company with a fascinating investment case. Years of underperformance while the company started a transformational journey in 2022 are all coming down to this point in time. The divestment of Catalyst Technologies, the new 3CR refinery for PGMs, higher margins in Clean Air and the prospects for breakeven margin in Hydrogen Technologies make for a compelling investment opportunity. In the meantime, dividends and buybacks should grow alongside profits, as free cashflow generation is at an inflection point.
The current macro environment for the automotive sector has punished the industry as a whole, giving us the opportunity to buy into a world leading business at near record low valuations. While we wait for a re-rating, the divestment of Catalyst Technologies unlocks value as capital is returned to shareholders
I am currently building a position and plan to buy in size if the share price drops, in case the underlying thesis remains intact.
Yours sincerely,
MODERN INVESTING
This is not financial advice and shouldn’t be treated like it. Everyone has a different risk tolerance, which is why I don’t want and can’t give anyone financial or investing advise. Everyone has to make their mistakes :)
Great analysis. JM’s transformation story is truly compelling, and you’ve nailed the key points from the Catalyst Technologies divestment to the promising margin growth in Clean Air and Hydrogen Technologies. The combination of strong free cash flow, dividends, and buybacks at such low valuations makes this a hidden gem for patient investors. Thanks for sharing such a well-reasoned case.
Unreal for advisory fees and taxes of ~£200 million regarding the division sale to Honeywell.
PGMs are and have been in a bear market for a while. However there are predictions of a pending bull market. As JM recycle PGMs then does this mean they could stand to benefit? Or will their input costs simply rise?