IMI, which supplies hydraulic controls for trains, is running ahead of time.

Yesterday’s year-end trading update was released more than a week ahead of schedule. More important, the FTSE 250 engineering conglomerate said that current-year profits would be “materially ahead” of forecasts. With IMI set to deliver this year the earnings that the City had expected in 2010, its shares surged by more than 15 per cent.

If there is a disappointment, it is that, like others in its sector, IMI’s recovery is being driven by lower costs rather than higher sales. The company acted swiftly to cut overheads, laying off 2,500 staff in the 12 months to June 30 — 16 per cent of its total headcount — and putting a further 3,700 on short-time working. It has also taken advantage of lower demand to accelerate the shift of production to lower-cost countries, such as China, India and the Czech Republic, while its factories were running below capacity. And it has benefited from cost reductions outside of its control, largely in its indoor climate division, which makes ventilation and cooling equipment, where it has been assisted by lower copper prices and raw material hedging contracts that were struck near the bottom of the market.

The result is that IMI will produce record operating margins of more than 14 per cent in the second half of 2009, suggesting that recession has done nothing to knock the company off course in meeting its long-term target of 15 per cent.

The broader encouragement is that IMI has been able to hold its prices firm — they are up between 1 per cent and 2 per cent across the group — and that there are tentative signs of a pick-up in orders in recent weeks (although these are mostly confined to its fluid power operations in Asia and North America). Overall, orders are down 12 per cent year-on-year, compared with the 20 per cent decline reported in June. Further, although IMI’s heavy-duty valves business has been hit by the postponement of capital spending on oil and gas facilities, its interests in power generation are showing signs of life.

Yesterday, IMI said that its CCI subsidiary had won its largest order in the nuclear sector, a deal with an undisclosed customer worth £55 million over eight years. The company will not start shipping valves until late 2010, but the nuclear contracting world is tight-knit and IMI’s ability to seal a deal at a time when nuclear new-build programmes are gaining momentum — witness yesterday’s government approval for ten possible sites in the UK — augurs well for future sales.

At 529½p, IMI’s shares have surged 87 per cent since July. However, on raised 2010 earnings forecasts, the shares still trade on only 11 times next year’s numbers, not dear given the scope for further upgrades. The 4.2 per cent prospective dividend yield also appeals. Hold on.

Hiscox

It will take more than Hurricane Ida — which was downgraded yesterday to a tropical storm — to blow Hiscox off course.

Yesterday’s trading update from the second-largest quoted Lloyd’s of London insurer showed that it was on track to report a doubling of pre-tax profits in 2009.

Abnormally benign weather this autumn in the Gulf of Mexico has spared Hiscox’s catastrophe division from any large insured losses. Premium income is ahead 10.5 per cent in the nine months to September 30 in constant currency terms.

The company is also generating strong returns from its investment portfolio. Hiscox, which has a high exposure to investment-grade corporate bonds, commendably held its nerve — and even increased its holdings — during the worst of the financial downturn, such that it has produced a 6.5 per cent yield, the highest among its peers. Recent declines in non-government bond yields will make such returns harder to replicate from here.

Hiscox’s attraction is that it has a strong capital base. It resisted the temptation to issue shares this year and has built a sizeable retail business, whose annuity-like profile makes its profits far more predictable than inherently volatile catastrophe lines. The skew of its underwriting business towards areas where premiums have held firm — and are expected to remain so, such as reinsurance, energy and professional indemnity — bodes well for next year.

But the problem is that, at 338p, up 10p, or a 29 per cent premium to Numis Securities’ forecast of net tangible assets, Hiscox is a discovered jewel. Even so, hold.

TT Electronics

For most of this decade, there has been a single powerful reason to hold shares in TT Electronics. The small-cap components supplier, best known as a maker of automotive sensors, doled out a 10.1p-a-share dividend — giving a near-double-digit yield for most of that time and making it one of the stock market’s most reliable income plays. But while a debt-encumbered TT has been able to avoid a rights issue during the toughest 12 months in its 21-year history, its dividend has disappeared and shows no imminent sign of return.

The near-fourfold rise in the shares from their March low will have provided plentiful compensation to recent investors. Net debt is falling towards £87 million — comfortably beneath TT’s stock market value once more — and planned disposals and tight management of working capital should further reduce the strain. Under Geraint Anderson, its new chief executive, TT is also expanding in aerospace, medical equipment and alternative energy, which should reduce the company’s exposure to automotive to less than one-third of sales. But at 70p, or 23 times next year’s forecast earnings, TT’s recovery is already assumed. Await further progress before buying.

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