Investment Column: IMI has what it takes to engineer gains

SIG; Playtech

Nikhil Kumar
Friday 26 August 2011 00:00

Our view: Buy

Share price: 807.5p (+22p)

The last time we looked at IMI, we decided to buy as we were pleased with the engineering group's deal to buy Germany's Zimmermann & Jansen. Since then, IMI's shares have helpfully gained ground. The question in light of yesterday's results and the growing concerns about global growth is whether it is time to bank profits, or bet on the company's strengths.

First, it is worth noting that the business, which makes everything from power-generation equipment to valves for drink dispensers, posted some strong figures. Adjusted pre-tax profits for the half-year to the end of June were up 26 per cent, on revenues that rose by 12 per cent.

Given its geographical breadth – IMI's operations span North and South America, Europe, the Middle East & Africa and the Asia-Pacific region – the company is exposed to all manner of economic trends. Crucially, however, it said yesterday that "whilst noting some slowdown in industrial demand in Southern Europe and the UK, we have, more generally, not yet seen any material change in underlying order trends since the end of June".

That is encouraging. And although it does face headwinds in some activities, most notably nuclear power, where the industry has been hit by the fallout from the disaster in Japan, overall it does not foresee the sort of sudden slump that the world endured during the credit crunch.

Indeed, as chief executive Martin Lamb points out, the wave of destocking that hit the sector when customers decided to run down their inventories rather than place new orders was the consequence of the fact that stockpiles were bulging after being built up in the run-up to the crisis. Today, inventories are not nearly as strong, given that the slump was fairly recent.

Adding to the attraction for us is the fact that, at around 10 times forward earnings for this year and under 10 times on the estimates for next year, IMI still looks affordable. It's not cheap. But it's worth it.


Our view: Sell

Share price: 100p (-6.5p)

The insulation and roofing firm SIG operates in what can only be called tough markets. Construction activity remains relatively weak, and economic growth across its markets in Europe and the UK is looking increasingly questionable.

The fact that governments of every hue are vying to outdo each other with austerity measures to curry favour with bond traders doesn't help either.

In the UK, the Coalition is firm in its desire to take an axe to spending. This presents challenges for SIG, which draws around 6 per cent of its annual revenues from new building programmes in the UK public sector.

To be fair, the company was forthright about the challenges, saying: "The board continues to expect growth in the second half to moderate, due to a combination of stronger comparators in both regions in which SIG operates, a weaker economic backdrop and the effect of public-sector spending cuts in the UK."

We opted to hold in August last year. Since then, after rising and then falling sharply, the stock is back up, leaving us with a nice profit. We would bank that and wait for the headwinds – which are not of the company's making – to pass before buying again.


Our view: Buy

Share price: 303.25p (-13.25p)

If there is one thing that investors do not like, it is uncertainty. It was, therefore, not too surprising that Playtech's announcement alongside its first-half figures yesterday that it was deferring its decision on its interim dividend until its full-year results triggered a drop in its share price.

Still, cooler heads must admit that the online software group's excuse did make sense. It said that it is involved in a number of discussions that could end up in it making either acquisitions or fresh tie-ups, and so, quite sensibly, it wants to keep hold of the cash for now.

Indeed, it bodes well that the company described the potential deals as "exceptional... opportunities" and, with its joint venture with William Hill generally perceived to have gone well, there is certainly the potential for them to prove exciting.

Playtech's figures, meanwhile, were strong, with total revenues jumping by nearly 20 per cent. It also said that it was set to meet its full-year forecasts.

Those of a cautious disposition may well want to wait on the sidelines and find out exactly what these "opportunities" are. For our part, the results and the sell-off that has helped to push Playtech down by 19 per cent since the start of the month, makes this a worthwhile opportunity even without the full details. Given its record, we are confident that deals will be positive.

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