Capital Allocation And Focus On Automation Will Strengthen Future Performance

Key Takeaways

• Strategic focus on automation and energy efficiency is driving robust order growth and future revenue expansion in key sectors.
  
• Disciplined capital allocation and market-led innovation are set to enhance return on capital and boost earnings through higher-margin growth.
  
• Currency and market fluctuations, increased restructuring costs, and tax adjustments could negatively impact IMI's revenue growth and net margins.

Catalysts

An engineering company, engages in the design, manufacturing, and servicing of engineering products in the United Kingdom, Germany, rest of Europe, the United States, rest of the Americas, China, rest of the Asia Pacific, the Middle East, and Africa.

• IMI's strategic focus on megatrends like automation, energy efficiency, and healthcare demand has led to robust order growth in process automation, particularly in sectors like hydrogen and data centers, which supports future revenue expansion.
  
• Efficiency improvements and the conclusion of a comprehensive restructuring program are expected to generate sustainable margin enhancements, driving operating margins above 20%, positively impacting net margins.
  
• The continuation of significant aftermarket growth, particularly with upgrade valves in process automation, is poised to enhance recurring revenue streams due to higher-margin parts sales, ultimately benefiting earnings.
  
• IMI's disciplined capital allocation strategy, including a £200 million share buyback and further bolt-on acquisitions, aims to enhance return on invested capital, supporting stronger EPS growth.
  
• The company's focus on market-led innovation, with projects across multiple divisions like automation and climate control, is expected to drive higher-margin revenues and bolster the EPS through improved pricing power and increased sales from new products.

IMI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming IMI's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.2% today to 13.6% in 3 years time.
• Analysts expect earnings to reach £333.2 million (and earnings per share of £1.32) by about March 2028, up from £248.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.2x on those 2028 earnings, down from 20.5x today. This future PE is lower than the current PE for the GB Machinery industry at 20.4x.
• Analysts expect the number of shares outstanding to decline by 1.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.83%, as per the Simply Wall St company report.

IMI Future Earnings Per Share Growth

Risks

• Currency fluctuations and foreign exchange losses have offset some of IMI’s revenue growth, which poses a risk to future revenue stability if these conditions persist.
  
• There are concerns of increased restructuring costs, which were higher than anticipated in 2024, affecting net margins if such costs continue to add unexpected expenses.
  
• Transition to new tax legislation and an increase in the adjusted tax rate from approximately 24% to 25% in 2025 may exert additional pressure on earnings, impacting net margins negatively.
  
• Uncertainty in the life sciences market, where organic revenue was 10% lower than the previous year and the company is not forecasting near-term recovery, could risk future revenue growth projections.
  
• Industrial automation market softness in Europe and the Americas has already shown a decline, which could impact future revenues, compounding risks due to market volatility.

Valuation

• The analysts have a consensus price target of £21.85 for IMI based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £25.0, and the most bearish reporting a price target of just £16.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £2.4 billion, earnings will come to £333.2 million, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of £20.02, the analyst price target of £21.85 is 8.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.