Another solid showing by IMI as margins build

Positive metrics all round for IMI (IMI) as the engineering group drove operating profit up by a quarter (at constant currencies) to £142m, underpinned by a 170 basis point increase in the underlying margin. Profitability at the half-year mark still stacks up well on an adjusted (organic) basis against comparators for HY 2019, indicating that financial performance has been improving regardless of what might be termed a skewed comparison with 2020.  

Shareholders were the beneficiaries of £101m in distributions and buybacks in the first half of the year and the board felt able to increase the interim dividend by 5 per cent to 7.9p. This largesse was made possible by free cash flow amounting to £216m (before corporate activity) at the end of 2020, although IMI has managed to generate another £79.3m in the period under review.

The group has been working actively to mitigate the impact of supply chain constraints and raw material cost inflation, but this is set against “positive market conditions within key business segments" including industrial automation, commercial vehicles and construction. After strengthening volumes through 2021, organic revenues and margins for IMI Precision Engineering are expected to outstrip the prior year as well. 

Management is guiding for adjusted EPS to be in the range of 85-90p, which is in line with the current consensus. Roy Twite, chief executive, confirmed the group is "on track to deliver [its] long-term ambition of sustainable profitable growth and margins of 18-20 per cent". It probably hasn’t gone unnoticed that the dividend payout ratio has averaged 63.6 per cent over the past five years, yet a forward rating of 20 times is hardly exorbitant. Hold.  

Last IC view: Hold, 1,085p, 24 Jul 2020