What's new:
■ Promotion to the FTSE 100
■ New joint venture in China
■ Strong recovery in pneumatics division
IMI squeezed into the FTSE 100 in the index's quarterly review, replacing the beleaguered defence company Cobham. That should spark a mini wave of technical buying as more tracker funds are forced to hold the stock. In the longer term, it may also help raise the engineering group’s profile and stock market rating, which remains low even after a year of regular profit upgrades.
Management again nudged up expectations in their November trading update. Sales for the first 10 months of the year were up 6 per cent at constant currencies. The Fluid Power division, which sells high-tech pneumatic and hydraulic components for use in goods like truck brakes, has been the stand-out recovery story so far, with revenues up 33 per for the year to Oct 31. That, combined with margin improvements from IMI’s long-term efficiency drive, have more than offset a slowdown in the later-cycle Severe Service business, which makes heavy-duty valves.
This month the group also announced a new joint venture with a Shanghai-based engineer to manufacture a certain type of valve for nuclear power plants - a booming industry in China. That should further strengthen its foothold in emerging markets, which accounted for about a fifth of sales in the first half.
Panmure Gordon says…
Buy. IMI is ticking many fundamental boxes, but sadly the market is not in the mood to grant it the full upside. We are confident that Severe Service can grow sales next year after an 11 per cent contraction in 2010, while Fluid Power still has 10-15 per cent revenue upside to reach its 2008 peak. The group has been working hard to produce above-average revenue and margin gains based on its market positioning, its engineering capability and various cost initiatives. We also have the prospect of more acquisitions, which should further boost earnings and help trigger a re-rating of the shares. Expect EPS of 65p this year.
Jefferies says…
Buy. IMI remains undervalued, with further margin expansion highly likely. Management is ahead of schedule in its plans to have 50 per cent of manufacturing in low-cost countries by the end of 2012, and volume improvement will continue to have an operational gearing impact, particularly in the Beverage Dispense division and Fluid Power. Pricing power should also be a positive influence, as IMI continues to focus on high value-added products and exit more commoditised offerings - a crucial issue for IMI’s valuation.
