Why Halma is so reliable

One mystery of the London stock market is why Halma isn't better known. After all, its track record can't fail to impress. It has been increasing its dividends by at least 5 per cent a year since 1980. It continued to grow sales and profits through the downturn. It has reported profit margins within its 16-20 per cent target band for the past 25 years.

Halma can turn out such figures because it has leading positions in a number of global high-tech niche markets. It's the world's largest maker of the safety sensors that flash and beep if you stand in the way of a closing lift door, for example. It dominates the automatic-doors business, recently winning a large contract to supply door sensors for China's high-speed trains.

One reason some investors shy away from Halma may be the bewildering variety of markets that it serves. That makes Halma look like a 'mini conglomerate', says Jon Lienard at broker Brewin Dolphin - it has around 35 operating companies split into three core divisions and 12 sub-sectors. The groupings are purely for corporate purposes, with the underlying companies otherwise autonomously run. It's an arrangement that is neither fashionable - conglomerates are the corporate equivalent of double-breasted jackets - nor particularly transparent.

Management is aware of the problem and even showed shareholders a cartoon video to explain its strategy at July's annual meeting. Besides, Halma is not a proper conglomerate because its businesses are united by a common theme - health and safety - and common growth drivers, such as environmental legislation, improving safety standards and ageing populations. Markets exposed to these trends tend to benefit from non-discretionary spending. That's one reason why Halma's revenues held up in the latest recession.

Another reason, oddly enough, was the group's conglomerate-like structure. Take its for the year to March 2010. In its ‘Infrastructure Sensors' division, sales in the automatic-doors business grew 10 per cent thanks to the large order from China. But the other sub-sectors: fire alarms, lift sensors and property security all posted declines.

The story was similar in the Health & Analysis segment. Photonics, which makes light-analysis devices for quality control in manufacturing and other applications, grew by 25 per cent, while the water business, which sends leak-detectors around Britain's ageing water-pipe network, shrank 7 per cent. Overall, group sales crept ahead by 1 per cent, helped by currency effects and acquisitions. Halma looks like a textbook case of the benefits of diversification.

Cost cutting was also a major help last year. Halma's underlying pre-tax profit margin hit a 10-year high of 18.8 per cent last year and, in the second half, even exceeded 20 per cent as revenues recovered. Chief executive Andrew Williams surprised City analysts by suggesting that the shift could be permanent “if we achieve good revenue growth”, effectively ditching the old 16-20 per cent bracket. Halma has surprised itself with the success of its cost-reduction measures and is now grappling to work out what its ‘normal' margin is.

Further margin gains look likely as Halma's more cyclical industrial and construction-related markets return to growth. The group recently reported strong improvements in all its markets for the first quarter of 2010-11. It used to have a reputation for disappointing organic growth boosted by acquisitions, but Mr Williams has largely corrected this problem since he was appointed to the top job five years ago.

One of his key plans has been to invest in markets outside Europe and the US, where Halma used to make the overwhelming majority of sales. China is now an important market, accounting for 4 per cent of group revenues after 59 per cent growth last year. Mr Williams wants that to move up to 10 per cent in five years – an ambitious aim for which acquisitions may well be necessary. But that's no issue for Halma, which is currently sitting on net cash and has a good track record of integrating companies.