UK Edition
Questor share tip: Halma is just a hold at a multiple of 29 times earnings
The world is flocking to cities. By 2050 another 2.5bn people could be urban dwellers, according to the UN. In 1990 there were 10 “mega cities” with a population north of 10m; by 2030 there are forecast to be 41, with much of the growth taking place in Asia and Africa.
The bustle and noise of city life brings everyday challenges: how to ensure there is sufficient transport capacity to keep everyone moving, how to maintain an adequate water supply.
Such “macro” trends bring with them health and safety risks. This should guarantee a busy future for Halma, the diversified engineer.
With a market value of just over £5bn, Halma is one of the FTSE 100’s crop of anonymous services companies that are bigger than you think. Another in this bracket is Intertek, the testing and inspection company Questor wrote favourably about in February last year (although we should have been more bullish, given its strong run as oil and gas exploration recovered).
Halma also reminds us of Renishaw, the measurement tool maker that despite trading on a sky-high multiple has so far outperformed this column’s expectations from February this year.
The company has four divisions. Its largest, infrastructure safety, includes fire and smoke detectors and systems that prevent lift doors crushing passengers. Second, its environmental and analysis products monitor water and food quality and pipeline flows.
The smallest unit, process safety, supplies safety systems and hazardous gas detection kit to guard against industrial accidents. Finally, the medical arm has tripled in size in a decade and provides equipment that tracks blood pressure and is used in eye surgery.
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It is a dazzling array of applications, the sort of compendium that an activist investor might pounce on and demand some clarity about for the sake of higher returns. They would probably get short shrift given that Halma, based in Amersham, Buckinghamshire, has just reported its 15th consecutive record year of revenues and profits, and has lifted its dividend by 5pc or more for 39 years on the trot.
Such performance has been reflected in the share price, which has quadrupled in six years, although it has ticked down since mid-June on a mixture of profit taking and the market losing steam over trade war fears. Readers who followed Questor’s advice in March last year to buy the shares have enjoyed a 30pc gain. In November we advised readers, correctly as it turned out, to take some profits.
The challenge is whether Halma’s future can live up to its past. It continues to bolt on acquisitions regularly and invests heavily in new services. Ben McSkelly of Shore Capital, the broker, links the standout 15pc organic growth at its environmental and analysis division to the benefit of high R&D spending, which is close to 7pc of revenues.
Andrew Williams, the chief executive, is putting more focus on connected applications and digital devices, which the City hopes will boost growth.
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Halma has a good record of trading out of assets that risk becoming commoditised and hunting for new value-added products instead. There is also a geographic opportunity to be tapped. The story behind 9pc group profit growth last year is broadly based but it is notable that sales in the Asia Pacific region exceeded those in Britain for the first time.
Halma’s annual meeting on July 19 will provide a fitting victory lap for the outgoing finance director, Kevin Thompson, who is retiring after 31 years. He is not the only long server.
Williams has notched up 24 years, including 13 in charge. There are a couple more steady hands in the boardroom: chairman Paul Walker, who led software company Sage through a 16-year halcyon era, and Tony Rice, the Cable & Wireless Communications veteran.
Halma shares trade on a chunky 29 times this year’s forecast earnings. Jefferies, the bank, pointed out that the multiple was right at the top end of Halma’s average over five to 10 years.
The company appears very well set, but Questor suspects at this price that there must be better value elsewhere for buyers. Existing holders should stay put, however.
Questor says: hold
Ticker: HLMA
Share price at close: £13.40