IMI's discount to peers is appealing

IMI (IMI) is becoming a more efficient business, with both margin expansion and improved working capital efficiency driving cash flow.

The company makes pumps and actuators. In other words, it sells equipment to enable the precise movement of liquids. Its customers are spread across the energy sector, as well as industrials and life sciences.

Its energy customers come under its ‘process automation’ division, and this was the fastest-growing. IMI said it is benefiting from concerns around energy security and the corresponding increase in investment in natural gas and nuclear energy. Organic revenue rose 14 per cent, while the new order book rose 17 per cent.

The industrials business was flat, with management saying it was facing a tough market. However, the fact that revenue didn't fall is credit to demand for its automation equipment as companies look for ways to boost productivity in a tight labour market. Meanwhile, life technology saw revenue rise a modest 2 per cent.

The most promising aspect of the business has been the growing operating margin, which expanded 90 basis points to 18.7 per cent. There has been a “restructuring programme” that has contributed £20mn on benefits. The plan will finish this year at which point the aim is to be close to a 20 per cent margin.

This profitability improvement, coupled with lower working capital, boosted adjusted operating cash flow by 26 per cent to £366mn, which leaves IMI with a healthy free cash flow yield of 7 per cent.

Trading at discount to peers such as Spectris (SXS), there appears to be space for valuation improvement as well as top-line growth to drive the share price in the coming years. Stick to buy.

Last IC View: Buy, 1,603p, 28 Jul 2023