In its self-proclaimed quest for the next GKN, Exane BNP Paribas has plucked for fellow engineering group Spectris PLC (LON:SXS).
For years, GKN had struggled to deliver growth but it was taken out earlier this year by FTSE 250-listed turnaround specialist Melrose Industries PLC (LON:MRO) for around £8bn.
READ: Spectris downgraded by Shore Capital
Analysts at the French bank reckon Spectris would be an “attractive takeout candidate” for a private equity group, given the scope to immediately cut costs particularly in the back office and its “undervalued” materials analysis business – its largest division.
“We assume that Spectris shareholders would accept an offer of 3,000p per share, which implies 27% upside to the current share price.”
Like Spectris, IMI PLC (LON:IMI) shares have underperformed the broader UK industrials sector in recent years.
IMI unlikely to be taken over or broken up
But Exane downgraded the group to ‘underperform’ (from ‘neutral), with analysts concerned about the “structural issues” within all three of its divisions.
“We believe Precision Engineering suffers from a lack of scale which is not easy to remedy; Critical Engineering has a large exposure to the structurally challenged Fossil Power end market and finally a growth strategy within Hydronic Engineering is only likely to deliver modest growth at best,” read the note to clients.
Exane’s number crunchers aren’t convinced that a private equity group would be interested in the group as a whole but do believe a break-up of the business could be the best way forward.
“Our break-up scenario for IMI yields a valuation of 1,400p per share on a sum-of-the-parts basis. However, much of the upside is due to eliminating corporate and recurring restructuring costs.”
Despite their recommendation, the analysts concede that this is unlikely to happen.
On top of the rating downgrade, they also cut their price target to 1,000p (from 1,150p).
IMI shares fell 2% to 1,117p in late-morning trade, while Spectris rose 0.8% to 2,409p.