Halma (HLMA) – Spreading the health (and wealth)

Halma (HLMA) – Spreading the health (and wealth)

Halma is a healthy and safety-oriented manufacturing group whose purpose is “to grow a safer, cleaner, healthier future for everyone, every day”.

Management have increased dividends for almost forty consecutive years. Combined with a vastly increasing share price, they’ve created many happy shareholders. Looking back at the last few years, dividends have been well covered by free cash flow. The policy is progressive with dividends growing at around 7% per year.

The share price hit its all time high in October but then fell back in that month’s correction. The price has since recovered to within 7% of that high (latest share price: 1,391p, market cap: £5,280 million).

Niche manufacturer growing sales internationally and segmentally

Halma grew its sales in the six months ending September 2018 in each of the geographical areas that it reports on as follows:

Area                                        Growth

  • USA                                        19%
  • Europe                                    14%
  • UK                                           21%
  • Asia Pacific                             5%
  • Other                                       17%
  • Total                                       16%

When I had look at the half year report I was impressed to find that it had also grown its sales in each of the four segments in which it operates.  Process Safety was up 10%, Infrastructure Safety 18%, Medical 10% and Environmental & Analysis by 23% so what are they doing so well?

The company over the years has successfully expanded both organically and through mergers and acquisitions.

Management are focused on identifying what they call “strategic growth enablers” by acquiring high quality, complementary businesses but also with disposals if they feel that they can generate a high return for the company.

So far in the current financial year they have made five acquisitions and one disposal.

More on the numbers for H1 2019

The three-year compound average growth rate in sales is around 14%. For H1 2019, sales increased by 15.6% as per the table below. Margins and costs look to be under control as the net income % improved versus H1, although it has slipped versus full-year 2018 and 2017.

Inventory increased less than sales growth so that looks to be fine although debtors have increased more than sales. The rise is not excessive and may be down to the timing of invoicing and cash collections and my calculations of current and quick ratios are both sufficient.

Table 1.

CHANGE

H1 2019 H1 2018 CHANGE FY 18 FY17
REVENUE

15.6%

585.5 506.3 11.9% 1076 961.7
NET INCOME %  

12.7%

12.2%   14.3%

13.5%

NORMALISED EPS

16.7%

0.21 0.18 15.4% 0.45

0.39

   
INVENTORY

13.7%

141.2 124.2 7.7% 128

118.8

DEBTORS

18.9%

241.8 203.4 10.8% 235.2

212.2

NET DEBT

7.5% 194.6 181 12.2% 220.4

196.5

 

Net debt increased by 7.5% in H1 but in total is less than two years’ earnings and interest cover sits at over 23 times.

The company is highly cash generative and cash conversion as a percentage of operating profits is an impressive 86%.

It has a £550m credit facility that runs until 2023: this should be enough pursue its growth strategy.

Potential risks and headwinds.

Like many companies, Halma lists Brexit and US/China trade relations among its principal risks and uncertainties. For the last financial year, UK/EU direct sales accounted for 9% of revenue and US/Chinese were 5%.

Overall, it is well-diversified geographically, with a decentralised and agile operating model.

Conclusion

Halma has an excellent track record of increasing sales, earnings and dividends with management who are experienced and successful at growing the business.

Over the years the market has felt that this has been worth paying for and the share price momentum of late indicates that this may still be the case.

I took a long position in Halma in January with a view to it being a long term holding in my portfolio.

 

At the time of publication, the author has a long position in HLMA.

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