IMI plc: Another strong performance from this global leader

IMI plc is a global engineering company listed on the London Stock Exchange and is a constituent of the FTSE100, the FTSE4Good Index and has a market capitalisation of £4.7bn.

Full year results to 31 December 2023 were published on 1 March and we were delighted to have Luke Grant, Head of Investor Relations and Group Financial Controller, and Edward Hann, Investor Relations Manager, give an introduction to the company, present the FY23 results and outline the prospects for 2024 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 FY23 results and the investment case. IMI is a £2.2bn 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. They are generally made to order bespoke products controlling the flow of fluid, gas, liquid or air.

The new strategy was launched in 2019 based around the company purpose of “Breakthrough Engineering for a Better World” and this means helping companies reduce carbon emission, improve efficiency, operate more safely and improve productivity. Beneath the company purpose are three strategic pillars of customer satisfaction, market-led innovation and reducing complexity.  The company has an excellent team of engineers with a customer focus who have worked hard on improving their net promoter score and customer engagement. The growth hub drives innovation and within this 40+ teams test ideas with the market. New innovative solutions from the growth hub have been a good source of incremental revenue. Finally, the complexity of the business has been reduced over a number of years with the manufacturing footprint consolidated. Sitting alongside this is a more recently launched financial framework of through cycle targets:  organic growth of 5%; adjusted operating margin of 20%; cash conversion greater than 90% and return on invested capital greater than 12%.

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.

The organisation structure was restructured into 2 platforms this year. The Automative platform is split between Process Automation and Industrial Automation.  Process Automation has applications in the energy market and to a lesser extent marine. It is the biggest sector and accounts for 37% of sales and has a growth target of 5%. Market drivers are energy security and decarbonisation. Industrial Automation provides solutions to manufacturing and to a lesser extent into rail. It is the second largest sector and accounts for 25% of sales and has a growth target of 5%. Market growth drivers are labour productivity and reshoring.

The Life Technology platform is split between Climate Control, Life Sciences & Fluid Control and Transport. The three sectors within Life Technology are smaller but growth targets are generally higher.  Climate Control accounts for 18% of sales and supplies products into buildings, hospitals and home with a 50:50 commercial/residential split. It targets growth of 5%+. Market drivers are energy efficiency. Life Science & Fluid control products support microdosing as well as values for the food and beverage end markets. It accounts for 12% of sales and targets 5-10% growth. Market drivers are ageing demographics and healthcare demand. The smallest sector is Transport and sells into the truck market helping to reduce diesel emissions and improve driver safety. It accounts for 8% of sales and targets 3-5% growth. Market drivers are emissions reduction, safety and comfort for the driver and regulation.

Three tangible examples were provided of market led innovation contributing to growth. Hydrogen orders doubled in 2023 through both investment in electrolysers (units convert green solar energy into hydrogen) and in hydrogen refuelling stations. Heatmiser is the UK market leader in the underfloor heating space. Their smart connected controls and products are now being launched in Germany and France. The Adaptas acquisition has gone well and there are a number of synergy orders that have been delivered and potential for the pipeline of business to grow.

In terms of allocating capital R&D, as a percentage of sales, has increased from 2.4% in 2019 to 3.3% and the target is to keep this above 3%. The company has deployed £400-500m of capital into acquisitions which have added 5% of revenue. The acquisitions are performing well and have met stringent RoI’s. Finally, the company has returned a steady flow of dividends to shareholders which have compounded at 10%pa recently and when net debt/EBITDA falls below 1x the company has returned cash to shareholders via a buyback.

The strategy has delivered sustainable improvements in financial KPIs since it was launched back in 2019. Organic revenue growth is averaging 3% (and above 5% in recent years), the adjusted operating margin has increased by 450bps to 18.7%, the aftermarket share of revenue has increased from 35% to 45% and there is a more even geographic spread with North American exposure notably higher.

ESG responsibilities are fundamental to meeting their purpose as they support customers lowering emissions and improving their own emissions. Scope 1 and 2 emissions have improved by 29% since 2019 and the target is to get these to net zero by 2040. Water usage in particular is also being reduce. Roughly 10% of capex spend is now going into energy efficiency projects.

Looking at the 5 year performance, the company has consistently grown over the period and EPS has compounded at 12% to 116.8p. The strategy is delivering higher margins and sustainable profitable growth, they are exposed to attractive growth markets with global macro trends, there is a well balanced portfolio with world class capabilities, that offers through cycle resilience, recently demonstrated with their performance through Covid and the Russian/Ukraine conflict, they have a strong balance sheet providing great flexibility and they provide solutions that enable energy efficiency, sustainability and safety.

FY23 results delivered another year of strong growth. Revenue growth was 7% to £2.2bn, of which 6% was organic. Adjusted operating margins rose 90bps to 18.7% close to the 20% through cycle target which they expect to achieve via further reductions in complexity delivering additional cost savings alongside faster growth in higher margin sectors. Adjusted operating profit was up 13% to £411m and there was a significant improvement in operating cash flow to £366m. The order book within Process Automation is at a record level which provides good momentum going into 2024. Confidence in these results and the future enabled the company to declare a final dividend up 10%.

Other details worth highlighting were the 8% revenue growth in the Automation platform and the organic growth in Process Automation orders of 18% with aftermarket orders growing 23%. Life Technology platform was more mixed with transport delivering 14% organic growth whilst Life Science & Fluid Control revenues fell 5%. The growth in Free Cash Flow was particularly impressive rising 48% to £234m and the company believes there is a clear path towards delivering in excess of £300m of FCF pa.

The company is guiding towards EPS of 120p to 126p in 2024, growth of c2.7-7.5%. The guidance reflects strong growth in Process Automation and resilience in Industrial Automation. The Life Technology platform is expected to be flat and overall margins are expected to improve.

The presentation finished with 3 key messages. The purpose led strategy started in 2019 continues to deliver good results, the new business structure around 2 platforms and 5 sectors is aligned to strong long term global growth drivers and for FY24 EPS is expected to be in a range of 120-126p.

A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact info@yellowstoneadvisory.com