The Investment Column: Trouble in pipeline at IMI

GARY ALLEN, chief executive of IMI, the toilet-seats and Coke- dispensers maker, says that investors have a chance to evaluate the business following its recent acquisition of Polypipe, the plastic piping company. Whilst a strong performance from Polypipe came to the group's rescue as it posted falls in interim sales and profits, this should not blind investors to the group's challenges elsewhere.

Group profits are dominated by the hydronic controls division - plumbing technology, if you prefer - which saw profits fall 15 per cent in the period largely because of its loss-making copper-smelting activities. They are being closed with the loss of 210 jobs. The division meanwhile suffers from weak markets elsewhere; stripping out the contribution from Polypipe, its profits halved. Unfortunately, the second quarter is traditionally Polypipe's strongest. It will not come to the rescue again in the second half.

IMI's drinks-dispensing businesses offer little comfort either. Coca- Cola, IMI's principal customer, has cut back investment in IMI's hi-tech dispensing machines. Whilst deals to supply fancy new dispensers to McDonald's have to some extent offset that, there are no signs that Coca-Cola is about to start spending again.

Pricing pressure in the markets of the fluid power business, which supplies the autos industry, has prompted the group to spend two-thirds of its pounds 10m first-half rationalisation charge on restructuring.

The smaller energy controls business was a casualty of the Asia crisis, though it did receive a $10m (pounds 6.3m) order related to the construction of a Chinese power station.

IMI's cost-cutting programme should save pounds 25m annually. The group claims that all its markets, except for drinks dispensing, are showing encouraging signs of recovery. But while trading is up a modest 3 per cent from the beginning of the year, the short-term outlook looks pretty unexciting, given that dispensing's problems will obliterate any uplift elsewhere.

The shares are well off the 532p high they hit before the sector was re-rated last year. Could now be the time to pile on for the long-term? The market seems to think so - it pushed the shares up 22.5p to 328p yesterday. That looks over-optimistic, however.

The Polypipe deal still leaves IMI catering to three sluggish markets and with an energy business saddled by lumpy, unpredictable orders. On analysts expectations of pre-tax profits of around pounds 142m and earnings 27p per share, IMI commands a forward price/earnings ratio of 12. Given the lack of obvious earnings momentum, that's fair. Investors should consider selling on shares' recovery while they still can.

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