Between Wishful Thinking and Reality: Johnson Matthey in Transition

Fossil fuel and industrial corporations face the central question of whether billion-dollar investments in new, "cleaner" business sectors are sensible, or whether it is wiser to extract as much profit as possible from existing, albeit declining, businesses. Another example illustrating the challenges of this decision is the 207-year-old British corporate group Johnson Matthey. The company's transformation highlights how well-meaning ideas can result in costly failures. The largest shareholder, Standard Investments, recently criticized the company for significant investments in "unproven" growth areas. The pressure on Johnson Matthey is understandable: according to FactSet data, the stock trades at a fifth lower than competitors based on the expected enterprise value to EBITDA ratio. The company is mainly known for its core business, catalysts, which, despite challenges in the automotive sector, continues to generate high cash flows. By 2031, at least 4.5 billion pounds in cash flow are expected from this sector. However, the issue is that catalysts could become obsolete with the transition to electric vehicles. Liam Condon, who has been CEO since 2022, is therefore focusing on new technologies like "clean" hydrogen, which requires significant initial investments. Since April 2021, the company has burned through 135 million pounds in cash, excluding divestitures, according to Standard's estimates. Critically, the hydrogen division has consumed 310 million pounds since the 2022 financial year. Yet the market for clean hydrogen is lagging. Despite measures already taken to stabilize, including delaying the start of production in a UK hydrogen components factory, shareholders’ patience remains tested. Capital expenditures are to be reduced, and cash flow generation stabilized in the coming years, according to Panmure Liberum's Lacie Midgley. The memory of painful past investments, such as in cathode production for electric batteries with write-downs of 363 million pounds, is present. Corporations like BP have learned that patience with "tomorrow's castles in the air" of the energy transition quickly wears thin, regardless of how visionary the plans are.