ii view: Halma predicts healthier profit margin

Full-year trading update to 31 March

ii round-up:

Halma (LSE:HLMA) today raised profit hopes as the maker of health and safety products such as smoke alarms, remained on course for its 22nd consecutive year of record adjusted annual profit. 

Good operational delivery and a favourable product mix now underpin management expectations for an annual adjusted profit margin to late March which is modestly above 21% compared to a prior estimate of around 21%. 

Shares in the FTSE 100 company rose 3% in UK trading having come into this latest news up 17% over the last year. That’s comfortably ahead of a 24% decline at measuring instrument maker Spectris (LSE:SXS). The FTSE 100 index is up 10% over the last year. 

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Halma operates across the three divisions of safety, the environment and health - making products to aid public and workplace safety, as well as devices to measure climate change and pollution, and enhance health.   

Good organic revenue growth year-to-date had been assisted by seven bolt-on acquisitions costing up to £158 million, and including MK Test Systems, a UK maker of electrical testing equipment, and Advantronic, a Spanish fire alarms manufacturer.  

As previously announced, Carole Cran, chair of Halma’s audit committee since 2016, is to replace Steve Gunning, chief financial officer, as of 1 April. 

Broker UBS reiterated its ‘buy’ stance post the update, with a target price of £31.50. Full-year results to 31 March are scheduled for 12 June. 

ii view:

Started in 1894, Halma today employs over 8,000 people across more than 20 countries. Headquartered in Amersham, Buckinghamshire, group customers include utility companies, commercial and public buildings, healthcare providers, as well as oil & gas and mining companies. Geographically, the US accounted for most sales during its last financial year at 44%. That was followed by mainland Europe at 21%, the UK and Asia each at 14% and the rest of the world the balance of 7%. 

For investors, trade tariffs being introduced for its biggest market the USA could eventually be extended to Halma related products. Strength in the pound is expected to have some dampening impact on revenues for the full year. Mainland European sales dipped 1.5% on a currency adjusted basis over the first half period, while a forward price/earnings (PE) ratio broadly in line with the 10-year average may suggest the shares are not obviously cheap. 

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To the upside, a diversity of products and geographical regions regularly sees challenges for one area countered by positives for another. Health and safety related products are required whatever the economic backdrop. Ongoing bolt-on acquisitions continue to assist growth, while a dividend track record of more than 40 years of annual consecutive dividend increases is highly enviable, despite a modest forecast dividend yield of 0.9%.  

For now, and despite ongoing risks, this well-managed FTSE 100 company looks to remain worthy of its place in already diversified long-term focused investor portfolios.

Positives: 

• Diversity in both products and geographical sales 
• Ongoing bolt-on acquisitions

Negatives:

• Economic and geopolitical outlook uncertainty
• Currency movements can hinder performance

The average rating of stock market analysts:

Strong hold