27th Feb 2015 11:17
LONDON (Alliance News) - Engineering company IMI PLC's shares were out of favour Friday after the company reported a slight fall in 2014 pretax profit and said it expects only modest organic growth in 2015 on weakened margins.
IMI shares were down 3.5% to 1,374.00 pence on Friday, one of the worst performers in the FTSE 250, after it said pretax profit fell to GBP246 million from GBP249 million, as revenue for the year fell to GBP1.69 billion from GBP1.74 billion in 2013.
Including exceptional items, notably the sale of non-core businesses over the year, total profit for the year rose to GBP671 million from GBP227 million.
The group's results were held back by the strength of sterling, which took a GBP96 million bite out of its revenue and a GBP18 million chunk out of its operating profit, and by a weaker European market in the second half.
But IMI hiked its dividend for the year to 37.6 pence from 35.3 pence last year. That includes a 7% increase to its final dividend to 24 pence from 22.5 pence.
Based on its current market conditions and excluding exchange rate impacts, IMI said it expects modest organic revenue growth in 2015 weighted to the second half of the year, with margins slightly lower due to the impact of the sale of its Eley ammunition businesses and the acquisition of German power valve company Bopp & Reuther in its Critical Engineering arm, along with ongoing investments across the business.
Revenue in its Critical Engineering business fell to GBP692 million in the year, down from GBP716 million in 2013, though the group did improve its operating margin in the division to 17.3% from 16.3% last year, meaning operating profit increased to GBP120 million from GBP117 million despite the revenue drop.
Oil and gas sector orders in Critical Engineering held up well, IMI said, with fossil-fuel power orders also increasing 4% year-on-year despite slow new order activity in China. But petrochemical sector orders fell 12%, primarily due to slowness in China, while nuclear power orders dropped 27%, in line with expectations, amid continuing weakness in the market post the Fukushima disaster in Japan.
Precision Engineering revenue also fell, down to GBP710 million from GBP723 million, but there was no margin improvement to offset the decline. Margins in the division weakened to 17.8% from 19.4%, despite an improvement in the second half, due to a weaker sales mix and increased investment by the company.
Oil and gas revenue in the Precision Engineering division fell 6% in the year, offsetting good performance in the industrial automation business in North America and Asia Pacific, though that segment was also hit by a deterioration in the European market in the second half, primarily in Germany.
In the smaller Hydronic Engineering business, revenue fell to GBP284 million against GBP305 million last year. Margins in the division also deteriorated, weakening to 18.3% from 21.1% last year, hit by investment in product development and costs related to the withdrawal of operations in less-profitable emerging markets.
"Despite challenging economic and market conditions in a number of our key sectors, we delivered results in line with expectations while at the same time making significant investment which will drive future growth. Our new strategic plan is now being executed across the group, and I am pleased to report that we are already starting to see early signs of tangible benefits," said IMI Chief Executive Mark Selway.
Brokers said the results came in broadly in line with expectations, but expressed concern about potential earnings downgrades for 2015 for IMI based on what they consider relatively gloomy outlook.
Investec put its forecasts, target price and Buy rating under review, saying that while IMI's 2014 results were in line with expectations, the company's 2015 outlook suggests a more challenging environment for its critical and hydronic engineering businesses than the broker had forecast.
Societe Generale also is concerned about IMI's outlook, saying it sees earnings forecasts for 2015 coming down around 5%, including a 3% headwind from currency translation.
By Sam Unsted; [email protected]; @SamUAtAlliance
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