Keep IMI on ice until an economic upturn arrives

Wilson Bowden building well; Photo-Me is developing nicely
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The Independent Online

Coors, the US brewer that now owns Bass, is trialling a theatrical new way of pulling a pint, delivering an ice cold beer in a blaze of blue light through a sonic pulse that gives the impression of ice crystals. Anything to catch the attention on a crowded bar.

IMI is the engineering company whose technology is behind the innovation. It is proud of the Coors product in its own right, but also because it represents what the past two years of painful internal restructuring have been all about: spending less time and money on manufacturing and more on product innovation and building relationships with its biggest customers.

Martin Lamb arrived as chief executive in 2001 and said, in effect, allow me £80m in restructuring costs and I'll slim down and spruce up this sprawling business. He is delivering as promised.

It is still not exactly fair to call IMI a "focused" group. Its pumps and valves are used in myriad different industries, from oil rigs to microchip factories. The "retail dispense" part of the group brings together things as diverse as pick 'n' mix dispensers, office drinks machines and that frozen beer. A building products division will eventually be sold, and a trading update yesterday said the falling oil price had improved margins in that business, increasing hopes of a disposal soon.

The update was well received, since it showed the benefits of moving up to 30 per cent of manufacturing to low-cost countries and sourcing increasing proportions of components from suppliers in the Far East. Pre-tax profit in the first six months of the year, before one-offs and write-downs, will be higher than the £66m recorded last year and therefore more than the market had been expecting.

IMI's peculiar mix of businesses has proved more robust than most engineers, so the company has outperformed the sector in all but the most recent rally. There is more benefit to come from the self-help measures of the last two years, as the Far Eastern factories move up to full capacity. The hope is that coincides with an economic upturn that improves marketing spend and industrial capital expenditure. Hold.

Wilson Bowden building well

If you are going to own a housebuilder, you'll want to own Wilson Bowden. The group has some of the best profit margins in the sector (about 19 per cent compared with an average some three points lower) and among the best returns on capital, too. Having closed the books on the first half of the year yesterday, the group said trading had met forecasts, as well it might with house price inflation confounding everyone to still be running at about 8 or 9 per cent, on Wilson Bowden's guesstimate.

Some analysts have had to move their numbers for the full year a bit higher as a result of yesterday's meetings, and the shares, up 4.5p to 964.5p, trade on a slight premium to the sector, with a dividend yield of 3.7 per cent.

Wilson Bowden does not operate at the steamy end of the market, where inflation has clearly stalled. Just one in 100 of the homes produced in its main division sells for more than £500,000 and, while spanning the country, operations are most heavily clustered in central Scotland and the North of England. It does little inside the M25. The recent acquisition of Henry Boot, which has bedded down well, took the group even further downmarket.

The risks are: 1) that the Wilson Bowden Developments side of the group (accounting for about 15 per cent of activity and encompassing bigger city-centre building projects combining office, retail and residential space) sees profits slide; 2) costs continue to creep higher across the industry; and obviously 3) the housing market collapses. The reasons why such a dramatic turn of events is not likely (planning constraints holding back supply; growth in numbers of households; low interest rates) all still apply, although investors may have to accept mediocre profit and share price growth as the slowdown develops. Hold.

Photo-Me is developing nicely

Photo-Me International is notorious for having paid for an acquisition in old photo booths. Its chief executive, the French boffin Serge Crasnianski, is notorious for selling £28m of shares at the peak of the boom. Most of all, this company, which operates 20,000 photo booths, is notorious for a string of profit warnings that has left its investors with a severe case of red eye.

Yet its shares zoomed from 18.25p when we said "hold" last December to 59p yesterday. There has been relief some of the vicious price competition in the UK photo booth market has eased and that it extended the contract to run booths for the French metro for another six years. Now the group hopes people will print out mobile phone picture messages in its new digital booths. Well, maybe. In any case, the cash flows from the booths are strong enough to pay down debt and fund investment.

The growth potential is in the digital photo processing labs it is selling to Kodak and which, after teething problems, are starting to be produced in decent numbers.

Ideally, the share price should include a discount to reflect investor nerves after past misdemeanours. It doesn't. On 30 times earnings forecast for this year (it's first back in the black), the shares are high risk, but it's worth keeping a few in the album.

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