Outlook finally improving for IMI and Rotork, says Berenberg

Both IMI and Rotork should be considered "some of the highest-quality businesses in the UK industrials sector, as seen by their margins and returns," Berenberg said in a research note on Monday.

However, both stocks have delivered underwhelming performances over the last decade, driven by minimal-to-negative organic growth, the broker said. Over the decade to 2022, Rotork's organic growth averaged out at -0.4% per annum, while IMI grew by just 0.2% per annum – significantly underperforming the wider sector.

"Fortunately, we believe this prolonged period of underperformance has passed, and that both IMI and Rotork finally look set to deliver a consistent period of top-line growth while maintaining their sector-leading margin and returns profiles."

The broker said that both companies should benefit from a combination of "supportive cyclical tailwinds" like improving global energy markets, trends like automation, electrification and investments into emission reductions, as well as significantly improved business mixes versus their recent history.

"We believe that the outlook has finally improved. The oil and gas market is set for a significant catchup investment period after years of undersupply. Both companies have improved their weighting to higher-growth end-markets, while increasingly benefiting from automation and electrification trends. We believe that both will deliver mid-single-digit organic growth over our forecast period, with Rotork potentially ahead of this level."

Rotork currently trades at 20 times earnings, while IMI trades at just 13 times.

Berenberg has raised its target price for IMI from 1,605p to 1,950p but cut its target for Rotork's shares from 420p to 370p.