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Questor: as oil recovers, IMI is worth buying in anticipation of better times ahead
Questor share tip: the valve maker has been diversifying away from the energy markets but a recovery in the oil price will do it no harm
It was the longest commute in British business. Mark Selway, the chief executive of engineer IMI, is heading back Down Under after essentially three decades of globetrotting.
For much of the past 20 years – barring a brief spell at the helm of Australian building materials firm Boral – he has led British companies from headquarters 10,000 miles away from home. At industrial pump maker Weir, Selway made it back to his family in Adelaide two weeks in eight.
For the past five years at IMI, his visits were cut to around three times a year because his children had grown up and visited more often. Still, no one can argue with “the lure of spending time with my grandchildren in the sunshine”, as he explained to analysts when his retirement was announced this month.
Selway was a big hit at Weir. Once Glaswegians got over his sale of the local manufacturing facility, he more than trebled operating profits, with a little help from the booming oil price. At IMI, it has been a case of better to travel than arrive. The target of doubling operating profits over five years – the sort of “big hairy audacious goal” Selway relishes – was quickly ditched.
In fact, statutory profits are actually lower now than when he joined. Selway has deployed with good effect the lean manufacturing practices he picked up while supplying Toyota at car parts maker Britax, but end markets for IMI’s flow-control valves have been tougher. The mixed bag explains why, since the start of last year, the shares have shed a third of their value.
However well they are run, these types of services company depend heavily on external factors such as the resources cycle, oil price and global economy. A good example is Weir, tipped by Questor last summer after an acquisition that promised to transform profitability, whose shares have yet to deliver following a warning of softening US demand.
They may still come good. Jon Stanton, the chief executive, was bullish last month that more fracking capacity would come on stream later this year.
For IMI, the decline in fossil fuel power generation has been tricky for its critical engineering division, which designs and makes valves and controls that can operate under extreme temperature and pressure and contributed £88m of operating profit last year.
Because oil, gas and power markets struggled, IMI has gone after business in the water and naval sectors – serving Middle Eastern desalination projects and nuclear submarines – but new construction orders were still 10pc down on 2017.
The great hope for growth is in liquefied natural gas. Construction orders have already doubled year on year and IMI is talking up the prospects of further brisk activity, plus aftermarket sales that begin two years after a project is commissioned. It needs a few more contracts like Gorgon, a huge gas project off the coast of Western Australia to which it supplied 3,600 valves worth about £50m.
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Meanwhile, the group’s precision engineering arm made £153m last year, from supplying pneumatic and flow controls for large trucks and industrial automation. The latter activity has turned negative and could present an ongoing challenge but it has been well flagged and looks to be priced into the shares.
Sales into rail and life sciences markets are growing strongly. IMI’s third division, hydronic engineering, makes water-based heating and cooling systems. It contributed £52m and strengthened margins.
Selway’s successor, Roy Twite, has had a long apprenticeship: he joined IMI in 1988 and has held senior roles in all parts of the business. Analysts at Numis, the broker, wonder if he can bring some pixie dust over from Halma, where he is a non-executive director. Shares in the health and safety engineer trade at more than double the multiple of IMI and significantly higher than the sector average.
In its favour, the oil price is predicted to continue its steady recovery this year thanks to Opec-led production cuts. What IMI needs from the not-so-new broom is a fresh vision and path to margin growth. Risks remains but, changing hands at 13 times this year’s forecast earnings, the shares are worth buying in anticipation of better times ahead.
Questor says: buy
Ticker: IMI
Share price at close: £10.08
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