A PGMs Situation Starting to Shine
Catalysts starting to play out for a Value Sits Model Portfolio name.
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Value Situations is NOT investment advice and the author is not an investment advisor.
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Last week was a upbeat one for shareholders of Value Situations Model Portfolio name Johnson Matthey Plc (JMAT), with positive news at both the market and idiosyncratic levels for the stock.
Firstly, news reports from Bloomberg and other outlets reported that platinum prices reached a 52 week high, driven by continued supply deficits and a sharp increase in demand from Chinese jewellers and precious metals investors:
With platinum and platinum group metals (PGMs) prices generally hovering near lows for much of the past 12 months, these latest market reports suggest that the market may finally be bottoming, with potential for a supply squeeze over the next 12+ months as platinum demand is expected to outstrip available supply.
Platinum is now up ~21% YTD, not that far off gold (+26% YTD), with silver and palladium (being the other most notable and investable precious metals) also appreciating meaningfully this year, up ~16% and ~11% respectively:
It’s important to put PGMs price performance this year in context - as the chart below shows, PGMs and platinum in particular have outperformed the major equity and materials-related commodity benchmarks this year (aside from copper):
It’s also interesting to note that despite the strong appreciation in PGMs prices this year, they are trading at a near-record -70% discount to the price of gold:
This backdrop clearly bodes well for JMAT, being the world’s largest recycler of PGMs and a critical producer of platinum and palladium within the global PGM supply chain. Specifically, JMAT appears to be particularly well positioned to benefit given the following:
PGMs prices appear to be at, or approaching the bottom, indicating JMAT’s PGM division’s earnings are likely at trough levels;
Being rare and precious metals, PGMs should catch up with gold at some point, particularly given inflationary concerns, and a closing of the current ~70% discount to gold to levels more in line with history would suggest significant PGM price upside ahead; historically platinum has traded at a ~11% premium to gold, while palladium has traded at a ~33% discount to gold (based on average prices over the last ~20 years);
The auto sector remains in the doldrums, but as with all cyclical industries, this will eventually recover at some point; and
Within the auto sector, it is now clear the “melting ice cube” bear thesis for the phase out of ICE vehicles within the next ~10 years is unlikely, with a delay in the EV transition for an array of reasons; this will extend the lives of ICE vehicles, and therefore demand for JMAT’s catalytic converters. In addition, the delayed transition to full EVs means increased demand for hybrid vehicles, which use more PGMs than ICE vehicles, driving further demand for PGMs.
Yet despite this favourable outlook, JMAT’s stock performance YTD trails that of other PGM-related equities:
[Note: please refer to my previous piece on PGMs for further discussion of the PGM market and related equities].
Note that while the chart above shows JMAT up +29% YTD, this is after last Thursday’s very positive news that JMAT has agreed to sell its Catalyst Technologies (CT) division to Honeywell for £1.8bn, or ~80% of JMAT’s market cap prior to the announcement; prior to that announcement, JMAT was up just +3.6% YTD, among the bottom three performers across PGM-related names, along with Anglo American Plc and Tharisa Plc.
It can therefore be assumed that JMAT’s strong performance YTD is almost entirely attributable to news at the idiosyncratic level, namely the sale of the CT business, with the market yet to price in PGM market tailwinds for the stock.
The sale of the CT business constitutes an event catalyst for JMAT, and comes following activist pressure from JMAT’s largest shareholder and rumoured acquirer-in-waiting, US privately-held conglomerate Standard Industries. In my original analysis of JMAT back in November 2023 I identified Standard’s presence on the shareholder register as a catalyst for the stock, and it is pleasing to see this catalyst now playing out.
Given the materiality of the CT divestment, it is necessary to re-underwrite JMAT again as the company evolves into a streamlined, PGMs-focused industrial business, having divested other non-core assets over the last three years.
With that, lets examine how the CT disposal unlocks substantial value for JMAT shareholders, and what the risk/return set-up looks like for the stock from here…