Halma reports 19th successive profit rise

Safety equipment maker Halma continues to do many of the things it has done successfully in previous years – achieving double-digit organic revenue growth and bolting on businesses that have a positive impact on earnings. Profit rose for the 19th year in succession and the proposed dividend increase of 7 per cent to 18.88p is the 43rd year in a row in which it has upped its payout by more than 5 per cent.

Despite this, it hasn’t been spared from the de-rating that has affected most industrial companies as investors worry about their ability to effectively source parts and pass through costs. 

But the company reported good growth across all segments of its business, with its environmental and analysis arm enjoying the fastest revenue increase – up 23 per cent to a 29 per cent share of the total. This puts it on level pegging with its medical arm, which also grew revenue by 19 per cent. Return on sales across the group stood at 20.7 per cent – within its target range of 18-22 per cent.

Its operating margin remained flat, though, and its cash conversion was weaker as it increased spending on inventories “to ensure continuity of production and manage price increases”. There was a working capital outflow of £62.7mn, compared with an inflow of £2.8mn in the prior year. Research and development spend also increased by £15mn to £85mn.

The big outflow, though, was on acquisitions, on which it spent a total of £168.5mn, although £14.2mn of this related to earn-out sums from past deals. It also recouped £62mn from the sale of electronic security company Texecom. 

Halma bought 13 new companies in the period – 10 of which were bolt-ons for existing businesses, leaving just three standalones. 

Although it would “be nice to find one or two larger companies to acquire... it certainly shows the pipeline of opportunities is strong”, said chief executive Andrew Williams, who also announced plans to step down next year, having been in the role for 18 years. He will be succeeded by chief financial officer Marc Ronchetti. 

Although the company said it expects continued growth and to “maintain high returns” in its current financial year, its shares fell by 6 per cent, bringing the year-to-date decline to 42 per cent.

Halma is a quality company, and this fall has made its shares more affordable, but at 27 times broker Shore Capital’s forecast earnings of 69.3p a share, they’re hardly in bargain basement territory given the macroeconomic outlook. Hold.

Last IC View: Hold, 3,107p, 18 Nov 2021