IMI PLC’s (LON:IMI) shares recently hit an all-time high but there is still more to come, reckons HSBC, upgrading its rating to ‘buy’ from ‘hold’.
Given the 40%-plus rally in the stock so far this year, “we might be a little late to the party, but we still see significant upside”, the bank’s analysts told clients.
The engineer’s better than expected growth in the past year suggests its new initiatives are delivering the growth that has “been missing from the story for at least a decade”, they said.
If the group can continue to grow in line with or above peers, then the analysts think it should trade in line with those peers, which resulted in the update and hiking of the share price target to 2,065p from 1,370p.
With capex plans for the industrial sector particularly strong, the analysts said this bodes well for IMI, especially as its efforts in terms of growth accelerators appear to be well-timed in terms of finding receptive customers.
Notwithstanding this, the market still expects the FTSE 250 company's growth to be below its peers, so the HSBC analysts expect the upcoming capital markets day on 29 June to focus on how IMI plans to accelerate growth.
“Our persistent bugbear with IMI has been a dearth of growth. Over the last decade adjusted earnings have not grown in terms of CAGR, whereas its peers have on average grown at c5% p.a.
“That helps explain the valuation delta to the same peers - over the last decade IMI has traded at an average discount of 14% in terms of forward EV//EBITDA. At the moment, it is tricky to delineate between recovery and sustainable growth, but we believe enough has changed at IMI to drive the latter.”
The analysts expect the CMD to build credibility that the company can close the gap to peers in terms of growth.
“We believe this will be the overarching message at its Capital Markets Day on 28 June. The market is not necessarily at this point yet, and as such, our estimates are 11% and 12% above the latest consensus forecasts for 2021 and 2022, respectively.”
The price target implies circa 21% upside.