Halma's resilient business helps it keep increasing dividend

Halma (HLMA) is showing the benefits of a business model which is largely government enforced. Strong growth from both its safety and environmental analysis businesses drove revenue, while an improvement in cash conversion meant operating cash flow shot up.

Halma sells the boring but essential equipment to keep us safe. So when government regulation around buildings, waste management or clean water changes, companies need to purchases its sensors and monitors to stay compliant.

The UK, which makes up 15 per cent of the business, grew organic revenue by 3.1 per cent on a constant currency basis. Unsurprisingly, given headlines this year about under investment in waste management, Halma’s strong performance was due to its water analysis and treatment subsector, which more than offset a “modest” decline from its safety business.

Its largest market, the US, makes up 42 per cent of revenue and grew 9.6 per cent on an organic basis. Strong performance from optical analysis offset a weakness in healthcare, where companies are destocking their medical equipment inventories. Management told the Investors’ Chronicle that the business isn’t dependent on government investment, but admitted that it expected the US infrastructure investment bill to drive more safety spending going forward.

The only market that shrank was Asia Pacific, which saw organic revenue fall 6.6 per cent. This is also now its smallest market with 14 per cent of the revenue. Management blamed the slowdown in the Chinese economy and the semiconductor industry, where spectroscopy is used to quality test the chips.

The fact that Halma kept growing despite some crinkles in the market is evidence of its strength. It is diverse in both its geography and the business it does. This means that issues will likely be offset by strong performances elsewhere in the world. Reduced working capital means operating cash conversion has risen to 96 per cent, up from 63 per cent this time last year, and this has enabled it to boost the interim dividend by 7 per cent.

Order intake is ahead of this time last year. Broker Shore Capital describes it as a “high quality defensive business with strong growth drivers”. Not a bad combination of characteristics. A lot of this is priced into the stock: Halma trades on a FactSet consensus forward price to earnings ratio of 23. But we are happy to pay up for quality. Buy.

Last IC View: Buy, 2,317p, 16 Jun 2023