Goldman Sachs upgrades IMI to 'buy', says concerns 'overdone'

Analysts at Goldman Sachs upgraded its recommendation for shares of flow control specialist IMI to 'buy' on Wednesday, citing margin improvements and industry consolidation.

Goldman noted that IMI shares seemed to have "fallen from favour" with investors, with the shares down 4% year-to-date compared to the average growth of 10% seen across the sector.

The New York City-based investment bank also highlighted the fact that IMI was trading on near-trough price-to-earnings ratio and enterprise value/EBIT multiples.

"We believe consensus underestimates the room for growth acceleration/margin improvement in one-half of IMI's sales," said Goldman, which added that investors seemed to be "overly concerned on deterioration in the other".

Despite headwinds looking likely to persist through 2019/20, Goldman said those concerns were "overdone" and believed that the market had priced in a 15%-7% decline in OSG over the next 12 months. Goldman was expecting no decline at all and noted there were pure-plays with greater exposure, such as Bodycote and SKF.

Goldman also forecast 130 basis points of EBIT margin expansion by 2021 and raised the company's M&A rank from 2 to 1, pointing to its relative size and greater value unlocking potential.

"IMI trades at a 15% discount to the sector on consensus 12m fwd EV/EBIT (6% historically) despite an absence of major structural challenges, above-sector returns, good cash conversion and a generous and progressive dividend," said Goldman.

"We raise our 2019/20 EBIT by 6%/9% and our price target to 1,180p from 950p."