Buy into the IMI recovery

IMI can be broken down into three divisions: precision, critical and hydronic engineering. The precision arm, which made up around half of IMI’s half-year turnover, develops motion and fluid control technologies that depend upon “precision, speed and reliability”. Its ‘critical’ segment, accounting for 32 per cent of sales, helps energy companies control the flow of steam, gas and liquids in harsh environments, while ‘hydronics’ provides water-based heating and cooling systems for the residential and commercial building sectors. 

IMI’s near-term outlook is not hugely encouraging. The company expects critical engineering full-year volumes to come in around 7 per cent down on last year, while a challenging global industrial outlook means precision engineering forecasts for organic revenues and margins are expected to fall on 2018. Meanwhile, house broker Bank of America Merrill Lynch recently trimmed its forecast by 2 to 5 per cent on lower expectations for the US heavy truck market, which is served by the precision division. The broker forecasts a 25 per cent reduction in 2020 production, leading to a 15 per cent decline in precision commercial vehicle sales in North America.

In March, IMI’s previous chief executive, Mark Selway, flagged the company’s exposure to a no-deal Brexit. The business has around £100m in trade with Europe, and had scheduled additional inventories that would last the group for around six weeks. It’s worth pointing out that critical engineering is less exposed – its lead time is typically around 12 months.

A small second-half revenue decline is expected, but initiatives across IMI’s three divisions should yield profits similar to 2018. A strategic review, led by new chief executive Roy Twite, is under way. IMI has lifted its spending on restructuring from £20m to £35m and expects around £20m in savings in 2019 – in the longer term it is targeting £30m in annual savings, largely in the precision business. The review will look to tap into opportunities in liquefied natural gas (LNG) – in its first half, IMI’s new construction orders were 36 per cent higher owing to petrochemical, marine and LNG work, which offset declines in other fossil fuels. IMI has softened its critical engineering division’s focus on fossil fuel and nuclear activities. It is reviewing its priorities in the sluggish industrial automation segments, while margin improvement remains the goal for hydronics, the smallest of its businesses. Less than 5 per cent of IMI’s overall sales are in the UK.

The chief executive will deliver the conclusions of his strategic review at IMI’s full-year results in early 2020. Mr Twite, who joined IMI as a graduate engineer in 1988 and was head of critical engineering prior to becoming CEO, is well-regarded by analysts. He could provide the company with the impetus it needs to return to growth. And while the headline figures have been nothing to shout about, IMI still boasts attractive capital returns, margins and cash conversion. Hopefully, this will provide Mr Twite with a platform to deliver on his objectives. The proposed $85m (£70.3m) acquisition of PBM, a manufacturer of “high-quality industrial valves and flow control products” that will become part of critical engineering, comes as a small surprise given IMI’s pending review. But it also sends a positive signal, and tells us that the company’s revamp will not solely be about making savings.