Shares in IMI PLC (LSE:IMI) rose 2% after JP Morgan picked out the engineering group as one of its top UK ideas, raising its price target from 2,500p to 2,850p.
Despite a strong run, with the shares outperforming the wider capital goods sector by 13% this year, the bank thinks there is still plenty left in the tank.
IMI is not a household name, but its products are everywhere: it designs and makes specialist valves and motion control systems used in industries from life sciences to energy efficiency.
These are not big-ticket items in terms of their customers’ overall system costs, but they are critical to performance, which gives IMI some welcome pricing power.
Around 45% of sales come from servicing and replacement parts, the so-called aftermarket, which is both high margin and recurring, a nice cushion against swings in new equipment demand.
The story has improved markedly since Roy Twite became chief executive in 2019.
The American bank argues that the business has largely closed the gap with its peers in terms of financial performance, even if that progress has not yet been recognised in the valuation.
In fact, IMI has actually de-rated against the sector, meaning its shares trade on lower multiples than rivals despite the operational catch-up.
JPM's analysts see several potential catalysts for a re-rating. First is a strategic review of the transport division, which could unlock value or sharpen the business focus.
Second is improved cash generation, which should support shareholder returns.
And third is a more balanced earnings profile, with several of IMI’s end markets, such as industrial automation, looking like they have bottomed out and could contribute to steadier growth.
Crucially, JP Morgan has shifted to a “sum-of-the-parts” valuation approach, effectively totting up what each of IMI’s divisions might be worth separately, rather than valuing the group as a whole.
On that basis, the shares should be closer to 2,850p, around 15% above current levels.
The stock was up 42p at 2,292p.