Financial Analysis Report on IMI PLC for Investment Decisions

This report provides a comprehensive financial analysis of IMI PLC, an engineering company, focusing on its performance from 2013 to 2017. The analysis utilizes various financial ratios, including profitability, efficiency, liquidity, solvency, and market ratios, to assess the company's financial health and investment potential. The report examines the state of the industrial engineering industry, considering factors like crude oil prices and their impact on IMI PLC's operations. It delves into the company's profitability, efficiency, and capital structure, highlighting trends and key drivers. Furthermore, the report includes a critical reflection on the company's challenges, such as the impact of low oil prices and restructuring efforts, and discusses its corporate governance mechanisms. The analysis also considers market ratios and valuation aspects, offering insights into IMI PLC's future growth prospects and investment attractiveness. The report concludes with an assessment of the company's financial position and provides recommendations based on the analysis.

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IMI PLC
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TABLE OF CONTENTS
Section A...................................................................................1
Introduction.............................................................................. 1
State of the Industrial Engineering Industry................................2
Financial Analysis......................................................................2
Profitability Ratios....................................................................................3
Efficiency Ratios.......................................................................................4
Liquidity Ratios.........................................................................................5
Solvency Ratios........................................................................................6
Market Ratios...........................................................................................7
Section B...................................................................................8
Critical Reflection...................................................................... 8
Corporate Governance Mechanism..............................................9
Valuation.................................................................................10
Conclusion...............................................................................11
References.............................................................................. 12
Section A
Introduction
IMI PLC is a engineering company with headquarters in Birmingham. It
was formerly known as Imperial Metals Industries due in the 1990’s, the

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company disposed the metal founding and metal smelting businesses. The
company currently has three major divisions namely critical engineering,
hydroponic engineering and precision engineering. Only a small portion of
the revenues of the company is derived from UK (about 5%) while Europe,
Emerging Markets and US account for more than 85% of the company’s
revenues. The products and services of the companies particularly deal
with fluid control in various industrial applications found useful in oil &
gas, power, actuation along with petrochemicals. The company embarked
on a decade long transformation process which enabled the company to
divest the non-core beverage and business intelligence businesses and
hence focus solely on the core businesses (IMI, 2016). The objective of the
given report is to carry a critical analysis of the financials of the company
in order from the perspective of making an investment.
State of the Industrial Engineering Industry
The ongoing time for the industry is challenging primarily on account of
fall in crude oil prices which has resulted in major projects being
postponed indefinitely. The traction from the petrochemical industry
continues to be lacklustre. Besides, the decline in prices of crude oil has
also adversely impacted the economics of shale extraction. Further, the
growth in the power industry in the USA in 2016 was quite lacklustre,
however, the demand in this sector from emerging sector continues to be
robust (IMI, 2017). It is quite possible that in the near to medium term, the

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crude oil prices could stabilise at moderately higher levels which would be
positive for the industry and especially for iMI.
Financial Analysis
The primary financial analysis tool that has been deployed is ratio analysis
which tends to focus on performance of the company in various aspects
thus considers not only profitability but also capital structure, liquidity
along with market performance. A time period of 5 years has been
considered for the ratio analysis.
Profitability Ratios
The profitability ratios for the company over the last five years is
summarised in the table indicated below (IMI, 2013; 2014; 2015; 2016;
2017).
According to Damadoran (2008), the profitability margins are significantly
as the businesses with higher profit margins tend to command higher P/E
which creates wealth for the shareholders. Additionally, consistency is
also essential. The gross profit of the company has continued to stay
within 42% to 46%. It is critical to note that considering that majority of
the revenues of the company are derived from outside UK in foreign
currency, hence there are fluctuations in revenue owing to foreign

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exchange translations. Further, in 2014, the company sold the beverage
business along with business intelligence to Berkshire Hathway in a bid to
focus on the current engineering business. Further, in FY2015 and FY2016,
the respective gross margins were lower on account of lower revenues
(IMI, 2016; 2017).
From FY2014, there has been a decreasing trend with regards to net
profits which is attributed to lowering operating profits considering the
nature of the business where economies of scale are clearly visible.
Additional, in the recent years, there has been an increase in the interest
costs as the amount of long term debt has increased especially in 2015
and 2016. The ROA and ROE tend to be higher for 2015 on account of a
reduction of both total assets and equity due to sale of beverage and
business intelligence business. Further, in the next two, there has been an
increase in the total asset base and shareholders’ equity coupled with
lower profits which have led to worsening of ROA and ROE (IMI, 2016;
2017).
Efficiency Ratios
The efficiency ratios for the company over the last five years are
summarised in the table indicated below (IMI, 2013; 2014; 2015; 2016;
2017).

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The asset turnover reflects the ability of the business to derive sales from
the existing assets (Christensen et. al, 2013) . In terms of asset turnover,
there has been a drop in 2015 which may be attributed to the increase in
assets particularly on account of increase in intangible assets due to
acquisition. For FY 2013, there was a significant decrease in the revenue
owing to a decrease in the oil prices which adversely impacted business.
The asset turnover seems to have stabilised in the current year and going
forward on account of ambitious geographical and product portfolio
expansion, the company expects to grow the topline in a challenging
industry environment (IMI, 2017).
The inventory turnover represents the ability of the business to convert
the inventory into sales (Brealey, Myers and Allen, 2008). The inventory
turnover for the business has declined in the given period which may be
attributed to mainly two reasons. One is the adverse industry environment
especially for oil and gas along with petrochemicals. The other reason
may be change in the business as in 2014, the business transformation for
the company ended where it exited all retail businesses which typically
have a higher inventory turnaround (IMI, 2017).

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The receivables turnover ideally should be high so as to ensure that the
outstanding receivables are converted into actual cash in the least
possible amount of time (Brigham and Ehrhardt, 2013). The receivables
turnover has seen a decline which may be attributed to the change in
business mix and also due to the difficult times that the oil& gas coupled
with petrochemicals is facing in the last couple of years as a result of
which the credit period may have been extended by the company thus
leading to higher financing needs (IMI, 2017).
Liquidity Ratios
The liquidity ratios for the company over the last five years are
summarised in the table indicated below (IMI, 2013; 2014; 2015; 2016;
2017).
The liquidity ratios are indicative of the short term liquidity of the
company. There is a declining trend in terms of current ratio and the quick
ratio also is following a similar trend. There is an improvement in 2014 on
account of significant decrease in short term debt by about £ 78 million.
Further, in 2015 there is a decrease in the current ratio on account of
higher short term while in 2016 there is an increase in the payables
leading to lower liquidity ratios (IMI, 2014; 2015; 2016; 2017). Despite the

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declining trend, considering the industry average value of current ratio at
1.4, the current values are not a matter of concern.
Solvency Ratios
The solvency ratios for the company over the last five years are
summarised in the table indicated below (IMI, 2013; 2014; 2015; 2016;
2017).
The solvency ratio tend to capture the capital structure of the firm along
with the ability to service long term debt (Damodaran, 2010). It is evident
that the balance sheet of the company is getting increasingly leveraged
which is apparent from the respective increase in 2015 and 2016. This is
on account of increasing long term debt which the company is aiming to
use to fund the expansion into new geographies and also develop new
products for the market. Further, considering the nature of the industry,
the debt equity ratio should not pose any concern (IMI, 2017).
On account of the increasing interest burden coupled with lower operating
profit, the interest coverage ratio has been adversely impacted in the
recent years. However, despite the fall, it remains quite healthy and does
not pose much risk of interest default with regards to outstanding loans.
Also, it is noteworthy that majority of the debt is long term which is

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essentially for expanding the business and only a very small amount of
loan has been taken as working capital which augers well for the company
(IMI, 2017).
Market Ratios
The market ratios for the company over the last five years are
summarised in the table indicated below (Yahoo Finance, 2017)
It is apparent from the table that post restructuring of the business, there
has been an improvement in the P/E ratio of the company which augers
well for the company. The P/E ratio is typically indicative of the future
growth potential associated with the company on account of the renewed
focus on the core business (Graham and Smart, 2012). Hence, from an
investor perspective, it would be fair to expect that there is expectation
that the company would deliver superior returns in comparison to the
past. However, considering the industrial engineering sector P/E in excess
of 35, the company is still trading at a significant discount (Burman,
2017). This may be on account of difficult ongoing environment and the
niche player that the company is coupled with low topline growth and
falling profitability margins owing to high raw material cost. However, a
positive aspect for the company is that there seems to have been an

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improvement in the dividend yield which augers well for the shareholders
going ahead (Brealey, Myers and Allen, 2008).
Section B
Critical Reflection
It is apparent from the information in the public domain that the company
is currently facing significant challenges owing to the low prices of crude
oil and the consequent decrease in orders from oil & gas, petrochemicals,
automotive etc. This is also reflected in the recent announcement by the
company where it cited these conditions and lowered the earnings
guidance which also led to a decrease in the share price (Dyer, 2017).
However, it is heartening of see that the company is coping up well with
the industry challenges by carrying on restricting in the Swiss and the
European operations with a bid to lower down costs. This is imperative
considering off late the company has faced lower margins on account of
rising raw material costs besides muted sales growth (Reuters, 2016).
Another key aspect of the company’s business model is the relative
isolation to UK economy considering that 90% of the revenues are
sourced from outside UK. In wake of Brexit, this augers well for the
company as the impact on business would be quite negligible for the
company (Simpson, 2017). Also, the attempt at restructuring the business

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which essentially ended in 2014 has been viewed positively by various
brokerage houses which at the time had expressed positive views about
the company. Additionally, the niche specialist engineering sector is
expected to be highly in demand going forward as the various industries
would focus more on efficiency for competitive advantage over peer group
(Burman, 2017).
Also, another factor which has been highlighted frequently is the P/E ratio
of the stock which is lower than the sectoral average. However, it needs to
be taken into consideration the similarity of IMI with other companies
coupled with the potential growth (Burman, 2017). Considering the niche
focus area and the current industry environment, in the near term growth
would be essentially muted and hence the emphasis for the company
would be on maintaining the margins (Jones, 2013). However, considering
the cyclical nature of commodities coupled with China’s economy coming
back to track, the oil prices may start firming up sooner than expected
and hence bring back higher growth prospects for the company which
would potentially lead to re-rating of the stock (Burman, 2017).
Corporate Governance Mechanism
The corporate governance mechanisms adopted by the company are in
line with UK Corporate Governance Code. Further, there is a periodic
evaluation of the board which is carried by external and independent
conduct and considers various aspects such as effectiveness and

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independence. There are various standing committees of the board
namely Audit Committee, Nominations Committee and the Remuneration
Committee. Each of these committees is headed by an independent non-
executive director and also the membership of these committees is
dominated by non-executive directors, which is in line with the global
practices (IMI, 2017).
Additionally, the various roles that are allocated to these committees are
also in line with their respective roles. The audit committee besides the
audit function is also entrusted with the management of the risk. Besides,
the various board composition best practices and norms are also adhered
to by the company which help in lowering the agency costs and provide
confidence to shareholders about the accuracy of the various disclosures
and financial information representation. The reports of the various
committees have been highlighted in the annual report so that the key
decisions and suggestions of these committees can be known by the
investors and other users. Also, the company has no previous history in
relation to the violation of corporate norms which augers well for the
external stakeholders as it minimises the risk of corporate fraud
(Christensen et. al., 2013).
Valuation
The asset value per share can be determined by dividing the net asset
value by the total number of outstanding shares (IMI, 2017).