IMI likely to close valuation gap on peers

Valves and actuator manufacturer IMI (IMI) has decided to rename its divisions. It is splitting the company between automation and ‘life technology’. The former will include the critical engineering (previously process automation) and precision industrial automation divisions, while the latter will include transportation, climate control (formerly hydronic engineering) and life science & fluid control (previously precision fluid).

Within automation, Process is the biggest division and had the most successful period. This is because it sells to natural gas customers where there has been big investment. Organic revenue rose 15 per cent while the order book was up 30 per cent, so there is further revenue growth on the horizon.

Natural gas investment drove most of the growth. with the other divisions growing in low to mid-single digits. Life science revenue actually shrank 3 per cent on an organic basis, with management blaming “modest levels of customer destocking”.

As part of the restructuring plan, management is aiming for a 20 per cent operating margin, 5 per cent organic growth and 90 per cent cash conversion. This leaves decent room for improvement. In the six months to June, the adjusted operating margin expanded 140 basis points to 17.8 per cent, and management continues to install “complexity reduction initiatives”. This is a little vague but margins are heading in the right direction so they seem to be having an effect.

Broker Peel Hunt continues to believe that the “growth opportunity is simply not reflected in the valuation”. The broker has IMI trading on a 2023 price/earning ratio of 14.2, compared with peers Rotork and Spectris which trade on 21 and 20 respectively. If IMI can hit its 20 per cent margin target it will begin to close this valuation gap. Buy.  

Last IC View: Buy, 1,576p, 03 Mar 2023