IMI plc: An excellent introduction to a high quality engineer
IMI plc, is a global engineering company listed on the London Stock Exchange and is a constituent of the FTSE250, the FTSE4Good Index and has a market capitalisation of £3.7bn.
Full year results to 31 December 2022 were published on 3 March and we were delighted to have Luke Grant, Head of Investor Relations and Group Financial Controller, and Edward Hann, Investor Relations Analyst, give an introduction to the company, present the FY22 results and outline the prospects for 2023 at a Yellowstone Advisory webinar. A recording of the webinar is available here.
The first part of the webinar covered an introduction to IMI and the second part covered the FY22 results and the investment case. IMI is £2bn revenue business with sites across the globe with a focus on valves and applications that control both motion and fluids. IMI products solve acute customer problems in niche applications in harsh environments with fine degrees of accuracy. The purpose is described as “Breakthrough Engineering for a Better World” and what they mean by this is helping companies reduce carbon emission, improve efficiency, operate more safely and improve productivity. The purpose was launched in 2019 and employee engagement has improved strongly over the last 3 years as staff have bought into the strategy. The company creates value by providing great service and customer satisfaction, developing innovative products in niche markets that meet customer needs and by reducing operating complexity.
IMI is made up of 3 divisions of which the largest is Precision Engineering which operates in the Industrial Automation, Life Sciences and Transportation segments. Critical Engineering operates mainly in the Energy market and Hydronic Engineering operates in the Indoor Climate segment.
Precision Engineering is the largest and most profitable division. The division manufactures products for motion and fluid control where precision, speed and reliability are essential. For example valves that control dosing which are used in intensive care unit ventilators or valves that go into braking systems on heavy duty trucks. A key product is the FAS Flatprop valve which goes into ICU ventilators and generated revenues of £100m during the pandemic. The division reported revenues of £986m, operating profits of £183m and an operating margin of 18.5% in 2022.
Critical Engineering manufactures products that help control the flow of steam, gas and liquids in harsh environments. These tend to be very large products, weighing several tonnes and an example would be a triple offset valve used in cryogenic testing which can operate at temperatures of -196 degrees centigrade. They also have valves that control the flow of liquid hydrogen which can operate at a temperature of -253 degrees. The division reported revenues of £713m, operating profits of £136m and an operating margin of 19% in 2022.
Hydronic Engineering is a supplier of products and solutions for hydronic heating and cooling systems. Products include thermostatic valves that control radiators and the TA-smart valve used in buildings to measure flow through devices. Using the data from these devices, buildings can be set up to operate more efficiently. The product range is being continually updated to include smart connectivity and to providing data to customers so they better understand the performance of their building assets. The beauty of these products is that they are only c3% the cost of the system but can help drive savings of 20-30%. The division reported revenues of £350m, operating profits of £71m and an operating margin of 20.3% in 2022. This division has very strong brands which support the higher margins, especially in Continental Europe.
A large part of their growth strategy originates from the Growth Hub which is where a quick 12 week analysis is carried out to see what products can be launched into new markets or geographies to solve customer needs in niche applications. Often regulation plays a helping hand as customers need to meet evolving regulatory requirements and IMI looks to help them find the right solution. Its been a huge success, delivering £52m of orders in 2022.
In addition to organic growth, acquisitions are a key part of delivering the Better World growth strategy. In the last 18 months the company made 4 acquisitions to help them grow in faster growing markets. Targets need to have synergies with IMI infrastructure and meet a number of financial criteria. They look for opportunities that will facilitate cross selling of products or enter into new geographies. Recent acquisitions in Life Sciences, Industrial Automation and Indoor Climate are all performing well. Heatmiser is a UK business principally and leader in smart thermostatic controls which should be able to scale across Europe alongside the existing IMI Indoor Climate infrastructure.
The company has a disciplined approach to capital allocation and they target a balance sheet with net debt to EBITDA in a range of 1-2x. At the end of 2022 the ND/EBITDA ratio stood at 1.8x and would reduce naturally by c0.5x/ year due to the internal cash generation. Investments are focussed on areas that fit the better world organic growth strategy and IMI expects to continue to spend above depreciation going forward. There is continuing operating cost investment in R&D with spend as a percentage of sales now above 3%.
Acquisitions remain a key part of growth with the key criteria that returns must exceed the cost of capital by year 3 and must not be materially dilutive to group ROIC by year 5. The company has a progressive dividend policy and raised the final dividend by 10% last year. The balance sheet remains strong with limited exposure to rising interest rates through 75% of debt fixed at c3%.
IMI takes it’s ESG responsibilities seriously and has recently introduced a new sustainability framework which has three pillars: Empowering People; Sustainable Solutions and Climate Action. Empowering People has seen employee engagement increase to 80%, accident rates have declined substantially and gender diversity has been steadily improving. Engineering solutions that are sustainable means improving the energy efficiency in buildings, producing analytical devices that save lives and reducing emissions. IMI also works to minimise the environmental impact across everything they do. They have reduced carbon dioxide emissions and have committed to achieving net zero on Scope 1 and 2 by 2040.
The strategy has delivered sustainable improvements in financial KPI’s since it was launched back in 2019. Revenues have grown 3% CAGR, the adjusted operating margin has increased by 360bps to 17.8%, adjusted profit before tax is up 11%, EPS up 13% and ROIC has increased by 130bps to 12.7%.
From IMI’s perspective the investment case is clear. The strategy is delivering higher margins and sustainable profitable growth, they are exposed to attractive growth markets with positive macro trends, there is a well balanced portfolio with world class capabilities, that offers through cycle resilience, they have a strong balance sheet and they provide solutions that enable energy efficiency, sustainability and safety.
Moving on to the 2022 results which were released on 3 March there were many highlights. This was the third year of the new strategy and built on two previously successful years. Revenue growth was 10%, of which 4% was organic and this is despite a 2% drag by exiting Russia. EPS growth was 15% generating good incremental profitability on the higher revenue. Overall, the orderbook was up 14% with Critical Engineering up 18%. Adjusted operating margins rose 80bps and there were improvements made in every division. All divisions also achieved industry leading customer satisfaction scores. Confidence in these results and the future enabled the company to declare a final dividend up 10%.
Precision Engineering delivered 18% growth after the acquisitions but also the best organic growth of 5%. Operating cash flow rose 6% to £290m which represented 80% cash conversion. Additional investment has been made in inventory over the last couple of years to deal with supply chain disruption in order to maintain great customer service and this has impacted cash conversion. There may be some positive benefits in 2023, indeed the company is guiding to 90%+ cash conversion.
Looking forward the group has a 20% margin target and is aiming to build on the good progress over the last few years that took the margin to 17.8% in 2022. Through a combination of continued reduction in complexity (£42m or 2%), growing the aftermarket business which has higher gross margins and further revenue growth, the company can clearly see the achievement of this margin target in the near future. The complexity reductions have been broadly completed in the Hydronic division and the benefits been delivered. Future benefits from reduced complexity will come from Precision Engineering and Critical Engineering.
In conclusion, IMI is three years into their engineering for a better world growth strategy and it is delivering strong results. Revenues have risen 3% CAGR and EPS is up 15% CAGR since the strategy started in 2019. The order book is up in all divisions and the growth hub is delivering new sales and they are confident this momentum will continue. Three acquisitions have been completed in the last year and 4 in the past 18 months adding complimentary businesses to the group. IMI has a progressive dividend policy and the final dividend was raised 10% reflecting confidence in the business going forward. The company is guiding towards EPS of 111p per share in 2023, growth of c6%.
Judging by the feedback from attendees to the webinar, this was a very well received presentation from the IR team at IMI and whilst it may not have been on the investment radar before it certainly is now.
A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact email@example.com