UBS upbeat about growth potential at IMI, upgrades to 'buy'

29th May 2014 11:33

IMI was trading higher on Thursday after Swiss bank UBS lifted its rating on the stock from 'neutral' to 'buy', saying that growth rates of sales at the engineering group have the potential to double in the medium term."An organic sales compound annual growth rate (CAGR) of 3% over the last decade has not been impressive. However, we forecast a doubling of growth with an organic CAGR of 6.4% out to 2018," UBS said.The bank believes that the Fluid Power division will be the "key driver" of this pick-up, "where utilisation of 40% excess capacity levels significant scope for accelerated growth".It also expects margins to improve too, rising by 330 basis points over the next five years. The bank said that investment costs should reduce as a percentage of an increased sales base at Fluid Power, while higher aftermarket "flow-through" should be margin-accretive."The strategic review results with the first-half results in August should provide a positive message on improved growth. However, our upgrade reflects not just increased confidence that new Chief Executive Mark Selway can accelerate organic sales growth, but also our view that in the medium term margins will rise as well."UBS has lifted its target price for the stock from 1,600p to 1,700p, which is based on a 10% premium valuation to the UK engineering sector.The stock was 1.6% higher at 1,586p by 11:34.BC