Halma has reported another record first half with revenue of £0.95bn, up 9%.
Recent acquisitions made a 5 percentage point contribution to this growth. And all divisions grew organically, albeit only marginally in Healthcare where customers were seen to run down their stockpiles. There was growth in all regions except Asia Pacific which was held back by weakness in China and India.
Underlying operating profit grew by 7% to £190m. This was slightly slower than revenue growth as margin improvements in Safety and Healthcare, weren't quite enough to offset a decline in Environmental & Analysis.
Free cash flow was up to £134.7m from £78.9m reflecting an improvement in operating cash conversion that now sits above the 90% target. Halma ended the half with net debt of £618.8m.
For the full year Halma expects underlying pre-tax profit to be in line with consensus forecasts which are currently looking for growth of 7.7% to £389m, against growth of just 3% in the half just reported.
The Board has raised the interim dividend by 7% to 8.41p.
The shares were up 4.9% following the announcement.
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Our view
Halma has put in a solid first half, with consensus forecasts suggesting higher sales and improved profitability in the latter part of the year.
At the start of the current financial year, the outlook for profitability was a little lower than markets were expecting, with return on sales (a measure of profit margin) expected around 20% for the coming year - analysts had pencilled in 20.4% at the time. That 20% marker is key, and with forecasts currently looking for a full year outcome of 19.7%, it's good to see things trending in line.
Halma's essentially a mash-up of around 45 businesses working to provide technology solutions in the safety, health, and environmental markets. This differentiated business model, geared toward non-discretionary and sustainability related demand, offers exposure to some resilient long-term growth drivers. These include increasing demand for healthcare, tighter safety regulations, and growing global efforts to address climate change, waste and pollution.
Halma has shown itself to be a safe pair of hands, recently delivering its 20th consecutive year of record profit. This provides some comfort that it can prosper even in a challenging economic environment, but there are no guarantees.
Acquisitions are key to the strategy, so cash conversion (the level of operating profit backed up by cash) is essential. Following a brief dip in the first half of last year, things look to have bounced back and we should see it above the 90% target this year. One of the first things we look at in a buy-and-build business model is its ability to throw off cash flow. Buying businesses isn't cheap; it's much more sustainable if it can be funded by internally generated cash.
Progress on deals over the half has lagged last year's record levels. There's a lot to do over the second half if Halma wants to maintain its ongoing target of generating 5% growth from new deals. That was just about reached last year by spending nearly £400m, but with less than £60m spent in the first half, there's a decent gap. We don't want Halma to buy for the sake of it, but we'd like to see more progress on the "healthy" pipeline over the second half. Net debt more than doubled last year, but still looks manageable at 1.4x cash profit. Add in good cash flow, and there's plenty of room for investment should the right opportunities arise.
All in, we're supportive of Halma's business model and growth drivers. But we aren't alone, and while the valuation has come down from its pandemic highs, it's still towards the top of its peer group. There's plenty of pressure to deliver.
Halma key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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