Halma plc (HLMA) Ordinary 10p

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Halma reported a 13% rise in first-half revenue to £1.1bn. That reflected an 11.5% rise in organic revenue, excluding currency impacts. There was double-digit growth in the Safety and Environmental & Analysis sectors, with a marginal increase in Healthcare.

Underlying operating profit rose 14.8% to £222.5mn, driven by top-line growth and improving margins.

So far this year, seven acquisitions have been made, four in the first half and three since the end of the period, for a cost of around £158mn. Free cash flow rose from £135.4mn to £170.8mn. Net debt, including leases, fell 1.0% to £646.7mn since the start of the period.

Full-year guidance is unchanged, pointing to “good” organic revenue growth and an underlying operating margin of around 21%, in the middle of its target range.

The Board has declared an increase of 7% in the interim dividend to 9.00p per share.

The shares rose 9.7% in early trading.

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.

First-half trading was strong, and margin improvements in the key safety unit have the potential to be sticky, likely a reason why markets gave a nod of approval on the day. Though not all business lines are firing on all cylinders, and 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, and Halma continued its strong history of cash generation into the first half of the current 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.

With £85mn committed to acquisitions over the first half, this is slightly above the relatively low levels seen over the same period last year. There’s already been a flurry of activity in the early parts of the second half, which is promising to see. 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 and with net debt at 1.27 times cash profit, plus 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.

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.

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.

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