Cheap IMI is one of Peel Hunt's 'top picks'

Precision engineering company IMI (IMI) is keeping ahead of inflationary pressures. Despite rising costs, the company that specialises in managing flows of liquids boosted its operating margin by 80 basis points to 17.8 per cent thanks to a combination of improved efficiency and price rises.

In the face of uncertain economic conditions, IMI did well to grow organic revenue by 4 per cent. Just as importantly, its order book increased by 14 per cent. There is a concern manufacturing companies move with the economic cycle, but management said customers are investing to improve efficiency as labour costs rise.

IMI has also been simplifying its own business. In precision engineering it managed to strip out £9mn of costs through “complexity reduction initiatives”. These words don’t say much but clearly there were things in the business also not doing much. Precision engineering improved its operating margin 70 basis points to 18.5 per cent and saw revenue rise 5 per cent to £986mn.

Critical engineering is the second-biggest business with £713mn of revenue. It provides 'flow control solutions' to energy projects and due to turbulence in energy markets this division should experience some tailwinds, especially from investment in natural gas projects. A 12 per cent increase in its order intake suggests this is already happening. There were also £4mn of incremental savings here.

Broker Peel Hunt was impressed by the results. The £364mn of operating profit was ahead of its £355mn forecasts and the cost savings means Peel Hunt is confident IMI will be able to deliver its promised 20 per cent operating profit margin.

IMI is currently trading below its manufacturing peers' valuations. Peel Hunt has it trading on a 2023 price/earnings ratio of 14.8, compared with 24 times at Rotork (ROR) and 20 times at Spectris (SXS). This valuation gap means IMI is one of the broker’s “top picks”.

There is a fear that European investment could slow in the coming year, but even if it did IMI could still prosper by selling energy-savings solutions from its hydronics division. Having around a quarter of its revenue coming from the US is also comforting given how much money the government is throwing at domestic manufacturing. Last year, US sales rose 30 per cent, faster than any other geography.

There could be some pressure from the cyclical downturn next year, but the company's valuation doesn’t look excessive. Management isn’t too worried about the macro conditions and is confident enough to forecast a 5 per cent adjusted earnings per share improvement. We move to buy.

Last IC View: Hold, 1,333p, 29 Jul 2022