ii view: Halma detects improving trends

Following a Covid-hit first quarter, safety & medical ops have seen a return to more normal conditions.

First-half trading update to 30 September

• Continues to expect adjusted full-year pre-tax profit to be 5%-10% below last year

ii round-up:

Halma (LSE:HLMA), maker of safety devices like flammable gas detectors, has reported improving second-quarter sales trends having suffered a 13% drop in Covid hit first-quarter revenues. 

A return of physical access to work sites following limitations under lockdowns had helped business across its safety sectors, while the restart of non-urgent surgery under easing Covid restrictions underlay a modest improvement for its medical products. Trading for its environmental & analysis business had remained robust. 

Halma shares rose by around 2% in UK trading and are up by around a third since pandemic induced market lows back in March.

Only two of its 53 facilities closed under Covid-19 lockdowns. More than 30 of its 43 subsidiaries deliver important safety, healthcare and environmental protection solutions, meaning most of its businesses were classified as critical by various governments.

Customer demand on a geographical basis had continued to vary. The US and mainland Europe were proving resilient, the UK and Asia Pacific more challenging. Although Asia was being helped by a gradual recovery in China and 2019 acquisitions. 

For now, and given current pandemic related uncertainty, management continues to expect current full-year profit to be between 5% to 10% below that achieved last year. 

First-half results are scheduled for 19 November. 

ii view:

Halma works in more than 20 countries. It operates four sectors: process safety and infrastructure safety, medical devices, and environmental & analysis. Offering diversity in both product and geographical terms and pursuing a strategy to grow both organically and by bolt-on acquisitions, Halma is a business which has developed a reputation for steady growth. 

Its last full-year results to the end of March 2020 reported record revenue and profits for the 17th year running. Its progressive dividend policy now runs to well over 20 years’ worth of consecutive increases. But a backdrop of Covid-19 hit customers is now expected to bring this impressive profit record to an end. 

For investors, ongoing Covid outlook uncertainty and some exposure to the oil & gas industry offer reason for caution. An estimated forward price/earnings ratio comfortably above the 10-year average also suggests the shares are not obviously cheap. However, they never have been, and investors have always been willing to pay for quality. And, while a potential profit drop of 10% over the current financial year is disappointing, it is still likely to compare well to many other companies and underlines Halma’s defensive qualities. Safety, healthcare and the environment are all areas of need, no matter what the economic backdrop. For now, Halma continues to justify its place in a diversified and long-term focused portfolio. 

Positives: 

• Diversity in both products and geographical sales 
• A progressive dividend policy

Negatives:

• First quarter revenue down 13%
• Valuation not obviously cheap

The average rating of stock market analysts:

Strong hold