If you were to ask me to name a UK-listed share that – valuation aside – I would be happy to own for the next decade then Halma (HLMA) would be pretty close to the top of the list. For me, it is a wonderful business that has delivered excellent returns for long-term investors.
I like problem-solving businesses which are not easy for competitors to copy. Halma and Spirax-Sarco (to be discussed in this week's full update) are great examples.
Halma’s businesses make and sell products that aim to protect and improve the quality of people’s lives. It is a global business with 84 per cent of its revenues earned outside the UK. The company is focused on four key sectors:
- Process safety (18 per cent of profits) – products include specialised interlocks to control critical processes, gas detectors, explosion protection, pressure relief systems and pipeline corrosion monitoring.
- Infrastructure safety (31 per cent of profits) – fire detection systems, smoke detectors, fire suppression systems, security sensors and elevator safety products.
- Medical (28 per cent of profits) – devices that check eye health and help with eye surgery, fluidic components used by medical diagnostic companies and sensor technologies used in hospitals to track assets and help with patient safety.
- Environmental & analysis (23 per cent of profits) – opto-electronic sensors, flow measurement, water quality testing, leak detection and UV water treatment.
The company’s products help to solve problems and stop them happening in the first place. They are sold into industries where there are high regulatory and safety requirements, which means that it is not easy for new competitors to enter markets and drive down Halma’s profits.
Halma’s strategy is to focus on profitable and growing niche markets that will do well regardless of the state of the world economy. Over the years it has combined growth from existing businesses with acquisitions to enter new areas. There has been a consistently high level of spending on research and development to create new products with spending regularly exceeding 5 per cent of revenues (5.3 per cent in the first half of 2018/19).
Including goodwill, which is around half of Halma’s invested capital, its ROCE is very respectable. Excluding goodwill and intangibles, returns on its operating capital employed are very good, indeed.
Halma’s half-year results released this week can only be described as very good. Organic sales growth at constant currency was 14 per cent with organic operating profits on the same basis up by 16 per cent.
Halma saw decent growth across all geographies.
Sector revenue growth was also very good.
I think the prospects for further growth look good and are underpinned by the trends of growing world populations and an increasing focus on better health and safety standards.
My main concern surrounds the Process Safety business which remains very reliant on oil and gas markets for sales of its safety interlocks. Demand for oil and gas is not expected to grow much in the future as people and businesses shift to alternative energy sources.
That said, new sources of oil and gas and newer techniques (such as fracking) will be needed to maintain production levels and this should be supportive for interlock sales. Halma is also actively seeking ways to diversify away from the oil and gas sector.
The outlook for infrastructure safety looks to be very promising. Urban population growth and increasing regulation bodes well for Halma’s fire, security and elevator businesses. These businesses have significant maintenance and replacement demand which tends to be very profitable.
Ageing populations and growing health problems such as diabetes, high blood pressure and cancer should feed demand for Halma’s medical business. The increased focus on water and air pollution and water resources is good for the environmental & analysis business.
The key risk is that Halma’s high profit margins attract competition. The fact it has been able to withstand competitive threats for many years is reassuring and a sign the business has been well managed. This has been helped by significant investment in new products and smart acquisitions that have brought new technologies to the company. This trend has continued in 2018.
Currency changes aside, it would not surprise me to see analysts’ forecasts for Halma revised upwards over the next couple of weeks.
The problem for investors with a business as good as this is the valuation that is attached to the shares. Halma trades on a one year forecast rolling PE of just over 26 times. This is punchy and prices in a lot of decent growth going forward. This might make it difficult for the shares to make much progress in the short-term, and therefore makes owning Halma shares a proposition for very patient long-term investors.
In the rest of this week's round-up, I looked at Apple, SSP Group, Marston's, Spirax-Sarco and easyJet. Alpha subscribers can read the full report here.
