Johnson Matthey surges as it announces £200m investment in battery material technology

Shares in Johnson Matthey surged on Thursday as the specialty chemicals group confirmed its guidance for the year and announced a big investment in its battery material technology business.

In an update ahead of its capital markets day, the company said it plans to make an initial investment of up to £200m in its battery material technology business starting next year, to build capacity to drive growth in a market which it estimates could be more than $30bn sales when battery electric vehicle penetration increases to around 10%.

By 1220 BST, the shares were up 9.6% to 3,241p, with investors seemingly reassured that the investment, which taps into the growing electric market, will help to mitigate the company's reliance on the declining diesel market.

Johnson Matthey said it expects to deliver sustained growth in its clean air division, breakout growth in the battery materials and health business and above market growth in the efficient natural resources division. In the medium term, this will generate "attractive" returns, expanding group return on invested capital to 20%, delivering a mid to high single-digit earnings per share compound annual growth rate and continuing a progressive dividend policy.

For the year to the end of March 2018,it expects foreign exchange to benefit operating profit by £13m, with estimated restructuring benefits in this financial year unchanged at £10m. The company also expects a further £50m of savings, mostly from procurement, over the three years beginning in financial year 2018/19. It plans to reinvest most of the savings, with the balance for margin expansion.

Chief executive Robert MacLeod said: "Johnson Matthey has strong market leading businesses capable of sustained growth and value creation over the short, medium and long term.

"We will enhance our leadership in the high margin, technology driven growth markets we operate in through focused investment and efficiency throughout the group. We are world class chemists. We have the expertise to solve our customers' complex and increasingly challenging problems by scaling up fundamental chemistry to provide commercial solutions which drive our growth.

"This will create value and a cleaner and healthier world. Through the strategy we will describe at our capital markets day today, we aim to be one of the best performing, most trusted and admired specialty chemical companies in the world."

Barclays said the statement paints "an optimistic mid-term outlook for automotive catalysis, healthcare and battery material".

"Investment in battery materials is particularly surprising and should be well received as long as JM has secured customers for the output," it said.

The bank said that guidance for "strong single-digit sales growth" in catalysis in the next few years is above its average estimate of 4.6% growth for FY18-20, which should bring some comfort to those concerned about a precipitous decline. Still, it cautioned that a statement of intent does not necessarily equal results and the company has its work cut out to clearly articulate how it will achieve these goals.

"In particular, there will inevitably be questions about the very large investment in battery materials, specifically whether JM has secured contracts on upcoming platforms or whether this is a speculative investment."

London Capital Group analyst Jasper Lawler said: "Thematic investors are diving into any sub-sector of the stock market that could benefit from electric vehicles. Johnson Matthey has now positioned itself within the EV space through lithium batteries."

At 1450 BST, the shares were up 13.2% to 3,348p.