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Questor: hold on to IMI as the new boss unveils his ambitious targets for the business
Questor share tip: the engineering group aims to boost margins and sell off less promising parts of its business
Divining the way forward for the oil price has been as clear as trying to peer through the black viscous stuff itself at times this year.
Currently, signs of slowing Chinese growth and the unpredictable US-China trade talks are being outweighed by Opec’s restraint on output. Brent crude has been as high as $74 a barrel during 2019 but its latest level of $64 is the result of steady gains from a trough of $57 at the start of October.
Such movement makes it hard to value those companies that rely on the resources cycle. In its most recent quarterly trading update, IMI, the FTSE 250 maker of industrial flow-control valves, cautioned that orders at its Critical engineering division were 10pc lower than a year ago because fewer projects had been booked in the petrochemical and water industries. Unsurprisingly it is working hard to diversify.
IMI found favour with Questor in March when we said the shares were worth buying in anticipation of better times ahead despite some tough external factors. They have since ticked up by 11pc. The catalyst for our enthusiasm was the appointment as chief executive of Roy Twite, a 31-year veteran of the business. Since he took the helm in May he has not hung around.
As of a month ago, IMI has a new strategy, which many company followers thought might not emerge until the full-year results in February. There are moves to sharpen the portfolio and improve returns. Price rises are already running at more than twice the 0.7pc average of recent years.
The most striking aim is to drive operating margins to, or close to, 20pc in each of IMI’s three divisions – far higher than some had hoped. The Critical division, which makes valves that can operate at extreme temperatures, made 13pc margins last year.
Mr Twite is also putting activities that generate 20pc-30pc of Critical’s sales under review. They are low margin and look likely to be jettisoned.
In a month of fantasy election promises, investors may doubt that captains of industry can do much better. Certainly IMI shareholders have waited a long time for some outperformance.
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Mr Twite’s predecessor, Mark Selway, quickly ditched his target of doubling operating profits over five years and exited with statutory profits actually lower than when he joined. Analysts at Goldman Sachs calculate that if they take the midpoints of the new margin guidance ranges without adjusting sales, their earnings targets for 2022 would be around 15pc higher.
The story here is reminiscent of Rotork, which is also in the business of managing industrial flows with its control systems. Much of chief executive Kevin Hostetler’s plan to sharpen margins is down to self-help. The shares have gained 13pc since we recommended them in late October.
IMI aims to squeeze another £35m in cost savings from streamlining the supply chain of its precision engineering arm, which made £153m last year and is the group’s largest profit contributor. Its third division, hydronic engineering, which makes heating and cooling systems, escapes the knife.
This burst of activity comes as trading remains flat. In the third quarter underlying sales fell by 2pc but margins still strengthened. At the precision division, which specialises in pneumatic controls, industrial automation sales fell by 7pc.
Analysts at Bank of America Merrill Lynch pushed their forecast for this year’s group sales decline from 2.9pc to 3.8pc but expect 2021 to be marginally better than previously, growing at 3.1pc.
Don’t expect the transformational deal talked of in the early years of the Selway era; Mr Twite favours small bolt-ons such as the £70m acquisition of PBM in August.
This Pennsylvania-based valve maker is being slotted into the Critical division, broadening IMI’s reach into pharmaceutical and biotech markets. It will deliver a financial return after three years of ownership.
IMI has potential. Trading on 15.5 times forecast earnings, the shares are not expensive, although they look less appealing than in March. They are a hold.
Questor says: hold
Ticker: IMI
Share price at close: £11.21
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