Chemicals firm Johnson Matthey (JMAT) is a misunderstood business offering plenty of value to investors bold enough to own a share experiencing waves of negative market sentiment.

We’ve picked the FTSE 100 business for its underappreciated play on electric vehicles (EVs) and significant growth potential from its Health arm. Underpinning this bullish view is the belief that its core emission controls business will be strong enough to cope with any downturn in the diesel market.

Approximately 60% of its sales in 2017 came from catalysts used to reduce emissions from vehicles and industry. There is some concern in the market that a switch to electric vehicles puts this division in terminal decline.

We think that’s being too pessimistic, particularly as the diesel industry is unlikely to disappear completely. Investment bank Morgan Stanley actually believes that Johnson Matthey’s auto catalyst sales will keep growing for at least the next 10 years. It forecasts 4.8% compound annual growth rate over this period. A key sales driver will be stricter emissions regulations in Asia.

Against this backdrop of a potentially more stable business than some investors expect, we’re really excited by the company’s electric vehicle battery technology.

It has developed enhanced lithium nickel oxide (eLNO) cathode material which could disrupt the market. According to Morgan Stanley, the material offers 20% to 25% more energy density and less cobalt compared to nickel manganese cobalt (NMC) cathode materials used in other electric vehicle batteries.

A predicted shortfall in cobalt supply versus demand is likely to push up the price of the commodity. Therefore vehicle manufacturers may favour a battery using technology such as Johnson Matthey’s given the reduced cobalt requirement.

It is worth noting that eLNO is still at the concept stage. Johnson Matthey has patented the technology and is in the process of building a pilot plant. Positive progress will be important to winning the market over and convincing sceptics that it can play a major role in the EV industry.

The Health division could deliver double-digit growth beyond 2020, according to Morgan Stanley. Johnson Matthey is a global supplier of active pharmaceutical ingredients and custom pharma services such as toxicological studies, development and commercial manufacturing of drugs. It has invested over the last couple of years in its European and US manufacturing capacity.

For the group as a whole, pre-tax profit is forecast to rise by 3.2% to £477m in the year to March 2018. (LMJ)

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