Slowing order intake hits IMI

"More challenging than expected" markets footed the blame for another bleak trading update from IMI (IMI). As the oil and gas sector cut back on investment in response to the plummeting price of brent crude, management reported weaker order intake for its industrial valves and a 4 per cent fall in group sales.

Sterling's strength against the euro didn't help. Just shy of 40 per cent of revenues are generated on the continent. Management said exchange rates as they currently stand would knock both revenues and profits back by 3 per cent this year.

Margins are also expected to take a hit from investments designed to revitalise the group's long-term prospects. Chief executive Mark Selway's appointment last year was accompanied by a plan to double operating profits by developing new products and improving manufacturing facilities and efficiency.

Those issues took the shine off a decent contribution from the recent £118m acquisition of Bopp & Reuther, a power-generation valve specialist brought in to strengthen IMI's exposure to emerging regions and more resilient after-market sales. The group's commercial vehicle operations also put in a decent showing as demand for auto parts rocketed, although this was somewhat offset by tepid market conditions in Brazil.

Investec says...

Hold (under review). Having downgraded to hold last month, we are now putting our 1,340p target price under review and shall reassess our estimates, valuation and recommendation. Although guidance has slipped since the prelims in February, the picture is mixed, with some changes positive and some negative. Order intake in the critical engineering division is being affected by the oil and gas downturn, but that is hardly surprising. We expect consensus estimates to be reduced today - our EPS estimates are respectively about 5 per cent and 10 per cent below consensus for 2015 and 2016, at 74.5p and 75.4p. None of this is entirely surprising, and we cut our estimates to near-bottom-of-the-range numbers last month.

Numis says...

Hold. Mark Selway has made major changes internally with manufacturing restructuring, investment in IT and new product development. The question is when and how this will feed into the bottom line. Until we see greater evidence of this happening, particularly in the key precision engineering division, we retain a degree of caution over the shares on their current multiple of 16 times forecast earnings. We slash our pre-tax profit forecast by 2 per cent to £270m to reflect the softness in critical engineering. Overall, the statement is cautionary, but that was also the case at the prelims.