LONDON (ShareCast) - (Sharecast News) - IMI's shares have derated too far, said Morgan Stanley on Tuesday, upgrading the engineer to 'overweight' on potential for a 20% gain.
The derating has mainly been driven by concerns on power generation, with fossil fuel accounting for 12% of group EBIT but recent work by the investment bank's analysts suggesting gas markets "could be close to trough".

IMI's service business "is attractive" with a 6% sales compound annual growth rate since 2008, with Critical engineering later-cycle than some UK peers, the capex in Process engineering "should be a tailwind in 2019" and valve pricing "also improving".

Returns are "not sufficiently priced in", with IMI's return on capital expenditure averaging 27.7% between 2007-17 compared to average UK engineers at 20.6% "and we expect this outperformance to persist".

So the derating has provided "one of the best entry points" in eight years, analysts said, advocating clients rotate out of prior top pick Rotork into IMI, for which the price target was hiked to 1,410p from 1,180p.

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