IMI have today reported that the year has begun much as expected, with the group set to see margins and organic turnover weaker in the first half. Improvements are expected in the second half as a result of orders won last year working their way through, and benefits from cost reduction and manufacturing improvement programmes are realised. Currencies are providing a modest boost to performance at current rates. The shares rose around 1.5% on the news.
IMI Critical Engineering The phasing of orders won last year has led to an uneven flow of business in the current year. In H1, following a 2% organic decline in the first quarter, IMI expect to see the business contract, with weaker margins. But in the second half, IMI expect to be delivering against the orders won last year. Higher volumes should see overheads spread more widely and margins are expected to rebound, helped by efficiency initiatives.
IMI Precision Engineering suffered a 7% organic sales decline, with weakness in Automation revenues. The division does not have the same order book benefit to look forward to in H2, nevertheless the group expect some recovery in margins due to cost initiatives underway.
IMI Hydronic Engineering saw flat organic revenues in Q1. For the full year the IMI believe the division should benefit from growth in newly launched product lines, leading to a good overall divisional performance.
At the full year stage, IMI's Chairman went out of his way to stress that IMI was in the fortunate position to be lowly leveraged at a time when there may be distressed assets available. So far, the company has yet to reveal any acquisitions of note, and Q1 trading panned out pretty much as predicted at the finals.
What might they buy? Rotork would be a great fit, but we doubt they would be interested; similarly if John Crane could be prised out of Smith Group, that would fit well too, though ongoing asbestos litigation is probably too bitter a poison pill to swallow. Time will tell, but there will be no shortage of candidates, given the fragmentation of industrial engineering markets globally.
In the meantime, IMI is paying the consequences of being a cyclical business in the wrong place, at the wrong time. It seems to be coping far better than in previous cycles, when we can recall the Precision Engineering division having a torrid time, to put it nicely.
The implementation of lean, a management system so lean that it cannot afford to be capitalised, is important. If IMI get it right, they will enter the next upswing with a very efficient set of businesses, capable of throwing off cash and responding quickly to any improvement in demand, with margins likely to rise fast too.
But the next few months are unlikely to see any great improvement in conditions, so a degree of patience is required. But right now, IMI looks like an interesting future recovery story, with the prospect of deal-driven excitements too, if Lord Kelvin's less than subtle hints come to fruition.
The stock yields around 3.9% on the 2015 dividend payment.
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