Halma lifts dividend for 44th year in a row

The market wasn’t overly impressed by Halma’s (HLMA) full-year results. Shares in the specialist equipment maker fell by 5 per cent shortly after some of the promising gains made since January. 

There are a couple of possible explanations. Statutory profit before tax was down 4 per cent, which management attributed to a £34mn gain on disposal that was banked the previous year. Excluding this one-off gain, profit before tax increased by 7.8 per cent, while adjusted profit before tax was up by 14 per cent at £361m, slightly above consensus expectations. 

More concerning was Halma’s cash conversion figure of 78 per cent, which was significantly lower than the 90 per cent targeted. Management blamed this on higher inventory as a result of supply chain issues. 

“There was a difference in cash conversion between the first and second half, which was due to some of the supply chain pressure easing in the second half and allowing conversion to return to our 90 per cent target,” said new chief financial officer Steve Gunning. 

Other metrics also improved as the year progressed. Organic constant currency revenue rose by 9.5 per cent in the first half and 10.9 per cent in the second. Similarly, adjusted profit increased by 10.9 per cent in the first half and by 17.5 per cent in the second half. Given that Halma’s order book is also strong – it is ahead of the comparable period last year – its growth prospects look good. 

Halma’s stellar track record is also reassuring. The group has now delivered 20 years of consecutive adjusted profit growth and 44 years of consecutive dividend growth of 5 per cent or more.

With an eye on future growth, research and development expenditure increased by £17mn to a record £103mn in the period, while a record £397mn was spent on acquisitions in a continuation of its dealmaking strategy. But these investments have increased Halma’s debt burden, and the group’s gearing ratio (ie, net debt to Ebitda) now sits at 1.38 times, compared with 0.74 times last year.  

Moreover, Halma is entering new territory. After 18 years in post, Andrew Williams has now retired as chief executive, leaving the company in the hands of Marc Ronchetti. The economic backdrop means it is a difficult time to take the reins, and Halma is more than three times bigger than it was during the 2008 financial crash. 

However, we remain convinced that Halma is a quality company with a proven business model and strong product portfolio. It doesn’t come cheap, but its price/earnings ratio of  29.5 is significantly lower than its five-year average. Buy. 

Last IC View: Buy,  2133p, 15 Dec 2022