Engineer IMI (IMI) warns margins will be slightly softer in the first half of 2014 causing investors to head for the exit – the shares down 6.3% to £14.51. Espirito Santo says today's guidance is likely to see consensus earnings per share forecasts for this year trimmed by 3% to 4%.


The fact the sell-off follows an otherwise strong set of 2013 results – with pre-tax profits up 8% to £321.6 million and revenues up 3% to £321.6 million –  reflects both the forward-looking nature of markets and the importance of margin improvement in delivering the kind of earnings growth necessary to justify the group's premium rating. Based on the current 2014 earnings per share forecast (pre any adjustments post the results) the shares are on a prospective price/earnings ratio of 16.1.


The sell-off may also reflect some disappointment that the full findings from new chief executive Mark Selway's review of the company will not be forthcoming until the interim results on 22 August. IMI makes fluid control valves for customers which range from nuclear power plants to the makers of drink dispensers and is focused on markets with growth drivers such as climate change, lack of resources, urbanisation and ageing populations.


In October 2012 it outlined a plan to increase its operating margin to 20% by 2017 (from the latest reported number of 18.4%). To achieve this it will concentrate a higher share of its activities in its ‘sweetspot’ – the areas where it is the clear market leader, can offer a product which is distinct from that of its rivals and thus achieve higher margins.


Broker Numis maintains its 'hold' recommendation and £15.50 price target and cuts its pre-tax profit estimate for this year quite aggressively. Accounting for a currency-related impact of 4% the forecast comes down 9% to £325 million. Analyst David Larkam comments: 'The shares trade on a premium rating justified by the high margins and cash generation. However, without further clarity on direction, now due at the interims, we see little to push the shares further.'


Cannacord Genuity, which has a 'buy' rating and £18 price target, comments: 'The important fact is a return to ‘normal’ margins in H2. The detail reads better than the headline suggests.'

Issue Date: 06 Mar 2014