Efficient Halma feels dual effects of Covid-19

Safety has been the watchword in corporate circles since late March. Intuitively, you would imagine that the advent of Covid-19 and the ensuing lockdown would have provided an ideal trading backdrop for a safety and medical equipment multinational. Yet half-year figures for Halma (HLMA) point to contrasting effects, typified by its medical division where rising demand for the group’s monitoring equipment was negated by the sharp reduction in elective surgical procedures.

That means that a backlog has developed, particularly regarding equipment supplies for two of the group’s key medical areas in orthopedic and cataract surgery. However, chief executive Andrew Williams said that elective procedures were not being stalled as the second lockdown got under way, so we can expect to see delayed revenues feeding through over the second half.

Shareholders may have been left wondering whether increased clamour for specialist applications would outweigh the general fall in aggregate demand in the wider economy. They may have become increasingly wary after Halma revealed a 13 per cent reduction in first-quarter revenue on an organic constant-currency basis.

True, management quickly initiated effective cost and working capital controls in a bid to bolster profitability and cash flows, but full-year statutory profit is still forecast to fall by around 5 per cent on fiscal 2020. The intensified focus on efficiencies is more evident in a cash conversion rate (adjusted operating cash flow as a percentage of adjusted operating profit) of 111 per cent, well above the target rate of 85 per cent. Meanwhile, net debt now represents 1.02 times cash profit, down from a multiple of 1.13 at the end of FY2020. All in all, another solid performance from a solidly backed large cap, but a forward rating of 46 times adjusted earnings is not an attractive entry point. Hold.

Last IC view: Hold, 2,291p, 14 Jul 2020