Is it worth investing in IMI? What to buy, sell or avoid

IMI is not one of the flashiest names in the FTSE 100. But the engineer, which specialises in making valves to regulate the flow of steam, gases and fluids, looks like it has the makings of a steady compounder.
The company, which is headquartered in Birmingham, was founded in 1862 as an ammunition factory. It has since had a varied history, but in 2013 it sold its beverage dispensing and merchandising units and repositioned to focus on manufacturing valves.
Today the group has two core divisions: automation, which includes both process and industrial automation; and life technology, which covers heating and cooling systems, life science, fluid control and transport. Around 60 per cent of its sales came from the automation business in 2023. Overall around 45 per cent of its sales came from its much higher margin “aftermarket” services in both divisions, where it offers installation services, repairs and replacements to its clients.
Overall it makes for a lucrative business. IMI’s operating profit margin stood at 18.7 per cent at the end of last year, fast approaching its target of 20 per cent. Typically valve customers cannot afford disruption to their production schedules, which means that IMI’s products are not often replaced easily and can retain strong pricing power.
IMI can also boast an impressive cash conversion rate of 89 per cent, which enabled it to launch a £100 million share buyback programme this summer. Without the buyback it would have ended the year with a net debt to adjusted cash profit ratio of around 0.8 times, below its 1 to 2 times target range, though it still stood at a comfortable ratio of 1.2 as of the end of June.
Revenues are well diversified by geography, too. Just over 40 per cent of its revenue comes from Europe, followed by 30 per cent from the Americas and 22 per cent from Asia-Pacific.
The group has some key quality markers: attractive margins, returns and a strong competitive position. But growth in recent history has been challenging, averaging an organic rate of just 0.2 per cent from 2013 to 2022 thanks partly to weaker spending by oil and gas clients, according to analysis by the broker Berenberg. This is beginning to improve: in the first half of the year it reported a 5 per cent rise in organic revenue, led by 9 per cent growth at its automation business.
However, industrial automation revenue fell by 4 per cent, which the company said was because of a weaker market in Europe and the Americas. IMI shares are cyclical, given their high exposure to industrial end-markets. For example, its climate control products, which make energy efficiency products for buildings, grew by just 1 per cent on an organic basis in the first half of the year because of weakness in the European construction market. IMI has been improving its diversification on this front: industrial automation now makes up less of group revenue than it did before, thanks to a stronger focus on after-market services and the life science and fluid control business. However, some analysts have estimated that while about 20 per cent of IMI’s revenue would face significant risk in the event of an economic downturn, it is much lower than around 60 per cent back in 2008.
IMI shares have rallied by 9 per cent in the year to date, although it still trades at 14.8 times forward earnings, at a significant discount to its London-listed peer Rotork, which trades at a multiple of 20.6. Such a wide difference between the valve makers is hard to justify, given that IMI’s earnings are expected to grow an aggregate 13.5 per cent by 2025, according to forecasts compiled by FactSet, supported by a catch-up period of capital expenditure in the oil and gas sector, especially in liquefied natural gas. This is not so far off a rate of 16 per cent at Rotork over the same period. Advice Buy Why Engineer improving growth at a discount to rivals
This week’s lower-than-forecast inflation figures led market watchers to raise bets on the Bank of England making two more interest rate cuts before Christmas.
That would be good news for investors eyeing up small British equities, and the JPMorgan UK Small Cap Growth and Income trust looks primed to gain.
The £477 million fund aims to grow its investors’ money by backing smaller British companies. Just over half of its portfolio is invested in businesses with a market capitalisation between £1 billion and £5 billion. The remainder is in companies worth less than £1 billion.
Its single biggest holding as of the end of September was in Premier Foods, the £1.7 billion, FTSE 250 owner of brands such as Mr Kipling, at 4.2 per cent of assets. That was followed by the cosmetics brand Warpaint at 3.7 per cent and Ashtead Technology at 3.3 per cent.
The fund, which launched in 1990, is particularly overweight in the consumer discretionary sector, which accounts for 29 per cent of the portfolio, about 10 percentage points higher than its benchmark, the Numis Smaller Companies plus Aim index.
The trust has a solid track record, having comfortably beaten its benchmark, which excludes other investment companies. In its financial year ended in July it delivered a total shareholder return of 43 per cent, compared with 13 per cent by the index.
The trust, which merged with the JPMorgan Mid Cap fund in February, also introduced a new dividend policy this year, paying out cash on a quarterly basis worth 4 per cent of its net asset value as recorded at the end of its previous financial year.
The fund trades at a 5.9 per cent discount to NAV, which suggests that it is among the most highly favoured among other trusts that invest in smaller British companies that on average have a 12 per cent discount. After the merger, costs are slightly lower, and JPMorgan UK Small Cap Growth and Income now looks bigger and better, with a respectable dividend yield of 3 per cent to boot. Advice Buy Why Reliable UK small-cap stock picker