The Investment Column: Sales of drinks dispensers add fizz to IMI profits

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The Independent Online

IMI, the Birmingham-based engineer, seems to be doing all the right things these days. Management, led by the well-respected chief executive Martin Lamb, has spent the past four years restructuring its operations so as to focus the business on producing valued-added products as opposed to commodity goods such as building materials and plastic pipes.

The company has two core divisions; a fluid controls operation that produces valves for power stations and gas plants; and a business making drinks dispensers. Both are enjoying solid growth. As a result, yesterday IMI was able to unveil a 9 per cent rise in annual pre-tax profits to £175m. The fluids division has benefited from soaring power prices which has prompted a jump in the number of power stations being built globally.

On the drinks dispensers side, innovation is driving demand at IMI. Consumers increasingly want more from both soft and alcoholic drinks. Traditional fizzy beverages are out and in their place people are drinking flavoured waters, juices and so-called flavour fusions (soft drinks cocktails). A lot of these require retailers to buy new dispensers, and this is boosting IMI's top line.

Mr Lamb has also done a great job taking costs out of the business. This has been primarily achieved by moving production to lower-cost countries including China, Mexico and the Czech Republic. During the past four years IMI has transferred 25 per cent of its manufacturing capability to such countries. Over the next three years it hopes to increase this figure to 40 per cent.

Since 2003 IMI shares have more than doubled, thanks to the steady earnings growth Mr Lamb has been able to engineer. Looking to the future, he promises more of the same, alongside some selective acquisitions.

At 543.5p, the group's stock trades at 15 times forward earnings. For a quality outfit like IMI this is not expensive. Buy.

Matalan

Bid speculation once again surrounded the discount retailer Matalan again yesterday. This time the Square Mile was alight with rumours of a private equity offer for the group as opposed to the traditional talk of an approach by Wal-Mart or Tesco.

Three private-equity firms are said to have held negotiations about a possible bid with John Hargreaves, Matalan's chairman, and majority shareholders. He controls 53 per cent of the company's shares so itsfuture is very much in his hands. In the past, Mr Hargreaves has been reported as wanting at least 300p a share for his stake. The latest speculation suggests he is willing to accept 220p.

But even at this reduced price it is difficult to see why a private-equity firm would be interested in the company. First, it has limited property backing. This makes it more difficult and expensive for a financial buyer to raise the cash required. Second, the company's decline continues. Last week it announced another fall in clothing sales, which account for 80 per cent of turnover. What a private-equity firm can do to reverse this decline that a succession of chief executives have failed to do is far from clear.

At 16 times forward earnings Matalan shares are overvalued. Sell.

CeNeS Pharma

CeNeS Pharmaceuticals is edging closer to launching its morphine-based painkiller, one of its two main drug hopes. Yesterday the biotech company announced a deal that strengthens its position around the drug and reduces the threat of a generic competition.

M6G is a new version of morphine which makes people who use it to relieve pain after surgery less nauseous than the real thing. It is undergoing final, Phase III clinical trials with results only months away. CeNeS hopes to have the drug on the market across Europe in two years and in the US two years later. Canaccord, the broker, estimates M6G could have annual sales of nearly $200m (£m).

But there is no guarantee the product will pass the trials. If it fails, CeNeS has little to fall back on other than CNS-5161, a treatment forpain caused by nerve damage. Although CeNeS is run by Alan Goodman, one of Britain's most experienced biotech entrepreneurs, its shares are for the brave only.

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