Halma eyes post-pandemic opportunities

Halma’s (HLMA) marketing team has it sewn up. The already-established mantra “to grow a safer, cleaner, healthier future, for everyone, every day” seems tailor-made for a post-pandemic world focused on reducing workplace density, improving air quality and tackling climate change-related biodiversity issues that could lead to the transmission of new animal-human viruses. 

The safety equipment manufacturer made a swifter recovery than initially anticipated during the second half of its financial year to March, with organic revenue at constant currencies flat versus an 11 per cent decline during the first six months of the year. Judged from the beginning of the year to the end of May, that metric is up 10 per cent year-on-year.

Confidence was signalled via a bump in the dividend and the resumption of M&A during the latter part of the year. The former was helped by reining in spending, although vital research and development expenditure was maintained at just over 5 per cent of revenue. It meant cash conversion - the ratio of adjusted operating cash flow to adjusted operating profit - came in ahead of target at 104 per cent. 

The easing of lockdown restrictions drove a recovery in organic revenue for the infrastructure safety division, which accounted for the largest proportion of the group total at just over a third. Management reckons changes in living and working patterns will provide further opportunities, including upgrades of office space to allow for better collaboration and greater use of touchless technologies.

Likewise, management sees opportunity in heightened awareness of the need to conserve natural resources for its environmental and analysis business, which among other things, provides testing and monitoring technology for water and air. 

Yet the group is not completely bereft of ESG-related risk. The oil and gas industry accounts for a not insignificant 5 per cent of group revenue. Chief executive Andrew Williams countered that the group is part of the solution in making them cleaner and safer. However, he added his company "definitely won’t be looking to buy a pure play oil and gas business from an M&A point of view". That should contribute towards a reduction in the revenue earned via the sector. 

Management is guiding for low double-digit percentage organic profit growth this year. This would represent a return to pre-pandemic norms, though raw material cost inflation and a negative currency impact may provide challenges to those forecasts. Halma’s ESG credentials mean it has the wind at its back, but that is not lost on investors. The shares trade at a rich 43 times forward earnings, which leaves the structural growth opportunities well priced in. Hold.

Last IC view: Hold, 2,438p, 19 Nov 2020