Redburn upgrades Johnson Matthey; says selloff on VW woes is overdone

LONDON (ShareCast) - (ShareCast News) - Redburn upgraded Johnson Matthey (LSE: JMAT.L - news) to 'buy' from 'neutral' saying the 35% year-to-date share price decline exaggerates the risk of a technology shift. It (Other OTC: ITGL - news) said the Volkswagen (Other OTC: VLKAF - news) emissions scandal has ignited the ongoing debate over automotive emissions and in particular those from diesel engines. Most poignantly, it has exposed the growing gap between emissions recorded under lab-test and on-road conditions.

Redburn said it had no idea how the saga will end for VW, but a total demise of the diesel car engine seems highly unlikely, particularly considering the need for diesel technology to allow car-makers to meet the EU 2020 CO2 emissions targets, which are legal requirements.

It said that if, however, it is wrong, the outcome would be painful but not disastrous for Johnson Matthey and estimated an impact of around £54m or 12% of 2016 earnings before interest and tax.

Redburn said a more likely scenario than the death of diesel will be a further tightening of the emissions testing processes potentially in conjunction with more stringent nitrogen oxide limits.

"Johnson Matthey should benefit. A 35% ($50m) increase in the average catalyst value per vehicle in Europe would add £28m (6%) to group EBIT. This is not in our forecasts," said Berenberg.

Berenberg said JMAT has a commercial relationship with Volkswagen and the company has confirmed that it believes its catalysts are installed on a proportion of the 11m recalled vehicles. However, it pointed out that the company has no involvement with the engine management system, so there's no reason any liability should arise from the VW episode that would financially impact JMAT.

"The shares are now trading at a 20-year price-to-earnings relative low when compared to the UK market. While current trading conditions might be challenging for JMAT the business model is not broken. The recent de-rating represents a rare opportunity to invest in its leading technology." Redburn has a 3,200p fair value on JMAT.

At 1522, JMAT shares were up 5.2% at 2,522p.