Thursday, 13 March 2014

IMI - New Portfolio Purchase

Fifty years ago IMI was a division of ICI, the once huge chemical conglomerate which disappeared from the stock market in 2007. IMI has been independent since 1978 but never seemed much more than a doughty Midlands metal basher. Headquartered in a fortress-like edifice on the Birmingham site where it had been founded in 1862, it produced an awful lot of copper.

Over the past decade the company has transformed itself following the appointment of former CEO Martin Lamb in 2001. Today, IMI is a global engineering group focused on the precise control and movement of fluids in critical applications. They work with leading international companies in over 50 countries to deliver innovative engineering solutions to address global trends such as clean energy, energy efficiency, healthcare and increasing automation.

IMI’s products and services are ideally positioned to respond to the key environmental and demographic trends that are shaping the future. Drivers for growth of the business include climate change, population growth and scarcity of natural resources, renovation of existing buildings and infrastructure and finally, healthcare related innovation for an increasingly ageing population.

IMI is now a specialist flow control group entirely focused on industrial end markets. This strong foundation creates greater opportunities for technical and operational synergies and provides an excellent platform for future growth. The Company’s Severe Service, Fluid Power and Indoor Climate businesses comprise approximately 12,000 employees providing innovative knowledge-based engineering solutions for market-leading customers around the world.

An estimated 70% of their products across the Group are bespoke, customised, differentiated or engineered to order for customers. This aspect helps to maintain the all important edge over competitors or barriers/moats to secure an advantage and secure higher margins.

Warren Buffett coined the term ‘economic moat’ to describe a business’ competitive advantage that keeps other companies at a disadvantage. He said :
"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors".
They became a FTSE 100 company in 2010 and its market cap has risen to currently £3.5bn.

I first acquired this company in my portfolio in 2011 at the price of around 830p and a yield of 3.3%. Early in 2013, I foolishly sold for a 50% profit as the yield had fallen - as with the sale of DS Smith and RPC Group last year, I had plenty of time to reflect on my decision as the share price continued to rise.

Recent Results

IMI have recently issued results for the year to 31st December 2013 (link via Investegate). Highlights are:

• Revenue up 3% to £1,744m
• Adjusted earnings per share up 12% to 72.6p
• Operating cash flow up 16% to £345m
• Recommended a 9% increase in the full year dividend to 35.3p
• Successful transition to new Chief Executive
• Disposal of Beverage Dispense and Merchandising businesses
• £620m of cash being returned to shareholders
• IMI now a focused specialist flow control business

Mark Selway, new CEO, commented:

"As IMI moves into the next phase of its development I have initiated a review of all parts of the Group. While this review work is ongoing, positive early findings are already emerging. These findings, together with IMI’s inherent strengths, including its robust balance sheet, indicate that the Group is well positioned to exploit a range of growth opportunities over the medium term".

"Looking at the year ahead: in 2014, based on current market conditions and excluding the adverse impact of exchange rates, we expect the Group to deliver modest organic revenue growth in the first half with margins slightly lower than in the first half of last year and an improved overall performance in the year."

Following a strong share price rise over the past year - currently 1425p - I accept the shares are probably fully valued. I suspect there could be further weakness in the months ahead as the new management team settle in but timing has never been a strong point for me and, in any event, the intention is to hold for the long term. I always recall the quote attributed to Buffett in these situations - ‘better to buy a good company at a fair price rather than a mediocre company at a great price’ (or words to that effect).

The new purchase has been funded from the sale of my holding in Carillion which itself has had a good SP rise over recent months.

As ever please DYOR.

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