Morgan engineered to re-rate

Morgan has more than compensated for the downturn in emerging markets by exiting low-margin divisions, cutting costs, creating operational efficiencies and branching out into higher-growth sectors, such as aerospace, healthcare and emissions control. Thanks to the ongoing execution of this strategy, which formed part of the 2013 restructuring drive that saw a name change from Morgan Crucible, underlying cash-profit margins widened again in the six months to June 2015, this time by 40 basis points to 13 per cent.

Restructuring efforts have been benefiting the top line, too, for the maker of products used in artificial hips, body armour, rocket launchers and high-temperature insulation. Constant currency sales grew across all regions (North America, Europe, and Asia and the rest of the world) at the halfway point, as organic sales rose 3 per cent and the order book climbed about 6 per cent year on year. That progress came despite a sluggish European economy and a 9 per cent fall in revenues from China following the slowdown in its industrial market.

Aside from careful cost management, a lot of that success has been credited to new product development, such as the global rollout of Morgan's high-temperature insulating material 'superwool'. That particular development triggered a 10 per cent increase in sales for the Technical Ceramics unit and a 17.6 per cent underlying operating margin. Such progress suggests management's focus on high-growth, high-margin areas - coupled with Morgan's status as a leader in its chosen niche markets - should help ease the storm of further global economic uncertainty. Reducing its exposure to economically sensitive and commoditised end markets - energy now accounts for just 6 per cent of sales - should certainly help in that respect.

Ongoing self-help opportunities, a sound business strategy make shares look good value on a next-12-months consensus multiple of 13.6 times. Bears may argue that Morgan's 8 per cent discount to peers stems from its adjusted cash profit margins lagging the sector. But while profitability at Morgan is on the up, the opposite can be argued of more commodity-price-sensitive peers such as IMI (IMI), Bodycote (BOY) and Weir (WEIR).

Sentiment may also have been weighed down by the departure of the man credited for reinvigorating the industrial engineer. Mark Robertshaw left the group at the end of the year, yet we reckon his replacement, Pete Raby, could provide a further catalyst for share price upside. Mr Raby, who was president of Cobham's (COB) successful communications and connectivity division, has the expertise to match Morgan's transformation into a high-tech, high-margin business. Yet despite appearing as the ideal candidate to usher Morgan into its growth phase, markets still seem to be mourning the departure of his predecessor.

There is also the possibility of renewed takeover interest. Last December, fellow materials specialist Vesuvius (VSVS) tried to merge with Morgan, only for its approach to be rejected. Time will tell if Vesuvius resurfaces with another offer now that the six-month cooling period has passed, or if another struggling engineer in the sector will make a move to secure Morgan's expertise and long-term potential.

Improving cash generation could also add to Morgan's attractions. Net debt may have crept up to £217m as more was ploughed into increasing capacity and capability to support future growth prospects. But broker JPMorgan Cazenove reckons free cash flow will grow by 51 per cent this year to £68m and get to £79m in 2017. The group offers an attractive historic dividend yield of 3.4 per cent, which is twice covered and is expected to reach 4 per cent by 2017.