Halma’s first-half trading update pointed to continued progression toward full-year targets despite varied conditions in its end markets.
First-half results will be released on 21 November, and are expected to show good organic revenue growth, ignoring currency moves. Underlying operating margin is expected to be modestly higher than the prior year, with strong cash generation.
Four acquisitions were made in the first half, all in the Safety sector, for a maximum consideration of around £85mn.
Full-year guidance points to “good” organic revenue growth, ignoring currency moves, and an underlying operating profit margin of around 21%, compared to 20.8% last year.
The shares rose 1.3% following the announcement.
Our view
Halma’s attraction is simple. It’s a mash-up of businesses working to provide technology solutions in the safety, health, and environmental markets. These may not be the most exciting businesses, but Halma’s clear purpose and quality of execution mean performance has been impressive.
Trading in the first half of the new year hasn’t shot the lights out. But that’s kind of what Halma does well - consistent delivery in the face of varied economic climates.
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, last year marking its 21st consecutive year of record profit. This provides some comfort that it can prosper even in a challenging economic environment. But there are no guarantees and not all its markets are in great shape. Healthcare being a prime example where budget constraints are keeping a lid on customer orders.
Acquisitions are key to the strategy, so cash conversion (the level of operating profit backed up by cash) is essential. Reassuring comments from management suggest cash generation has been strong over the first half. 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.
With £85mn committed to acquisitions over the half, this is slightly above the relatively low levels seen over the same period last year. There is a broad trend that activity picks up in the second half, so we’ll be watching for that. We don’t want Halma to buy for the sake of it, but having a healthy pipeline of deals and being able to execute is key.
The balance sheet looks in good shape, despite debt ticking higher. With net debt at 1.35 times cash profit last we heard, and strong cash flow, 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 at the top of its peer group. There's plenty of pressure to deliver.
Environmental, social and governance (ESG) risk
General Industrial companies are medium risk in terms of ESG but can trend up to the higher end of the spectrum depending on subindustry. The primary risks can include labour relations, emissions (either product or production-based), business ethics and product governance. Other concerns are waste and health & safety.
According to Sustainalytics, Halma’s management of material ESG issues is strong
Halma has appointed a dedicated management committee to oversee these areas and implemented a strong environmental policy. While its ESG reporting doesn't fully align with leading standards yet, there is a clear link between executive pay and sustainability goals. Additionally, Halma has a robust whistleblower program in place to ensure accountability.
Halma key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is not advice or a recommendation to buy, sell or hold any investment.No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.