Our head of equity strategy talks to CEO Andrew Williams about the big stories in Halma’s results.
When the going gets tough, there’s one company that always seems to survive and prosper. Like a prize fighter, it sticks to its game plan, absorbs the blows, and comes out on top. This kind of resilience doesn’t come cheap, but investors in Halma (LSE:HLMA), an acquisitive technology conglomerate, have been richly rewarded for backing its unique approach.
Halma’s consistent positive returns over the past decade secured it a place in our own Wild’s Winter Portfolio. Last year, while many other companies fell sharply, its shares rose by 11.5% during the winter period – November to April – compared with an 18.4% decline for the FTSE 350 index.
Promoted to the FTSE 100 in December 2017, this £9 billion company is largely unknown outside its sector and financial circles. But I’ve been speaking to management for years, and I took the opportunity to catch up with chief executive Andrew Williams as Halma announced half-year results that impressed the City once again.
What are the main factors behind new profit assumptions?
Big news today is that adjusted profit before tax for the 12 months to 31 March 2021 is expected to decline by less than expected. Profit will be down around 5% on the previous year rather than the original estimate of 5-10%.
“We increased guidance because the first half was better than what we expected when we issued the first set of guidance in July,” Williams tells me. “Each month the group has exceeded forecasts. We sell into resilient long-term growth markets, and people need our products, even in lockdown.”
“We talked to analysts this morning about resilience by design rather than good fortune. Fundamental changes in medical care, safety and other areas have enabled this resilient performance.”
Halma’s medical business makes respiratory products which have obviously sold well, although that has been offset somewhat by a decline in demand for elective procedures for things like cataract surgery. But overall, customers have continued to invest, so they’re clearly confident in markets over the long term.
“We’ve weathered the storm and are well positioned for any challenges ahead,” said Williams.
Margins maintained despite weaker profit
Both revenue and adjusted pre-tax profit fell by 5% in the six months ended 30 September, down to £618.4 million and £122 million respectively. Add back one-off items and profit fell by 9% to £96.3 million.
However, return on sales, or profit margin, remained steady at 19.7%. There were two elements behind this.
“Having led the group through the financial crisis, I knew we had to batten down the hatches as far as discretionary spend was concerned,” said Williams. “We took £20 million out in Q1 versus Q4 of the previous year. Most was through marketing, travel etc, so revenue growth returned in Q2 off the lower cost base.”
Costs were added back through the second quarter to September, with salary reductions reversed, and some staff even receiving pay rises, proving how Halma’s agile business model can quickly turn costs on and off.
Also, different parts of the company generate different returns, so growth in Halma’s higher margin businesses has also helped sustain returns. Williams highlights areas like environmental analysis, pollution monitoring and other long-term structural growth markets.
How much did Covid cost the business?
“We haven’t monitored additional costs to just keep operating. But we self-funded £2 million of furlough payments to staff in the first half. Our global businesses spent another £2 million on redundancy payments.”
The second half has started well. Orders are coming in again. What are the strategic investments planned for the second half?
Williams mentions two main areas. The first is a resumption of merger and acquisition activity. Halma typically buys two or three new companies every year, but has put that on hold through the pandemic. “When the crisis hit, we kept conversations going but didn’t do any M&A,” he explains.
Also watch out for new investment in technology. Plans to spend more were already in place at the start of the year, so about £10 million of capital expenditure will soon start flowing into building out technology into the business and on support infrastructure. This will help Halma get products to market much quicker. There’ll also be another £2 million from operating expenditure.
Have you modelled the impact of a more prolonged wait for a vaccine?
Halma reported strong cash generation during the first half, and a robust balance sheet with net debt of £315 million and “significant” liquidity. There has been no furlough or debt funding sought, or received, from the UK Government.
“We’ve modelled all of these things,” says Williams. “Through the first lockdown, we only had three out of 53 operating facilities shut down. Two-thirds had a mandate from local authorities to keep working as a critical solution.”
“Now, for the last six to eight months we’ve been operating in a new way, with adaptability and can keep operating through lockdown periods. Whatever is thrown at us, we can deal with it.”
“We’re geographically aligned and have huge organisational agility. The way we’re structured, local managers have autonomy. Agility day-to-day and geographical strength is helpful.”
How did you make your decision on the dividend?
Halma has increased the interim dividend by 5% to 6.87p per share.
“At the very outset I laid out a scenario of where we needed to be come September/October,” said Williams. “Furlough funding and staff pay cuts wouldn’t be consistent with paying the dividend. We knew we were in a good place financially and hadn’t sought support, so we paid it.”
“Can we afford it? We had strong cash conversion, and liquidity has improved through the half year, so we do have financial capacity to keep paying the dividend.”
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