IMI widens operating margin

Precision engineering company IMI (IMI) has made its name ensuring things keep flowing, specifically engineered products that control the precise movement of fluids. The 160-year-old business has also shifted its own shape over the years, buying, selling and restructuring divisions to adapt to changes in the market.

Last year was no different. It ended the year splashing out £204mn on Adaptas Solutions, a US-based business that makes spectrometry and laboratory equipment used by life sciences companies. It also spent £39.7mn restructuring the European arm of its biggest division, Precision Engineering, consolidating factories.

On top of this, the £226mn spent on share buybacks meant that one key flow, cash, reversed course during the year. The company reported an outflow of £297mn, compared with an inflow of £116mn a year earlier. This meant net debt almost doubled to £623mn.

Management seems relatively sanguine about this.

The company’s adjusted operating margin widened by 1.4 percentage points to 17 per cent, and its adjusted EPS increased by 15 per cent to 92p. The strong start made with the integration of Adaptas contributed to fairly bullish guidance for this year. Chief executive Roy Twite said on an earnings call that even after a further £200m of buybacks, the company expects to achieve an adjusted EPS of about 102p-103p this year.

“Potentially, there's some upside from there as well depending on how events pan out externally,” he said.

However, these could just as well be bearish as bullish – especially in the energy market, given current events.

Using the guidance given, IMI is currently valued at almost 15 times earnings, which is close to its five-year average and just about looks like fair value. Hold.

Last IC View: Hold, 1,743p, 30 Jul 2021