ii view: Halma shares drop despite record revenue

Shares in this FTSE 100 safety product maker are down by more than a quarter year-to-date. Buy, sell, or hold?

First-half results to 30 September

• Revenue up 19% to £876 million
• Pre-tax profit down 13% to £146 million
• Adjusted pre-tax profit up 11% to £172 million
• Interim dividend up 7% to 7.86p per share
• Net debt of £500 million, up from £275 million

Chief executive Andrew Williams said: 

"Halma made further good progress in the first half. We saw strong demand for our companies' products and services in the period. Our order book is exceptionally strong, having grown from the record level seen at the start of the year. 

“The operational environment presents both challenges and opportunities; we remain on track to make further progress in the second half of the year, and deliver another good full year performance."

ii round-up:

Health and safety product maker Halma (LSE:HLMA) today detailed record revenues, with growth across all sectors and regions aided by a falling pound. 

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A one-fifth rise in revenues year-over-year to £876 million helped push an 11% increase in adjusted pre-tax profit to £172 million. The interim dividend was raised by 7% to 7.86p per share, potentially adding to its enviable dividend record of increasing the payout for more than 25 years consecutively. 

Statutory pre-tax profit fell 13% to £146 million given the lack of a business disposal gain made this time last year. 

Halma shares fell by more than 4% in UK trading having come into this latest announcement down by around a quarter year-to-date. Fellow specialist engineer Spirax-Sarco (LSE:SPX) is down by a similar amount during 2022, while the broad FTSE All World index is down by just under a fifth. 

Halma’s safety technologies protect and save lives, allowing the safe movement of people in public areas along with protecting both assets and infrastructure across the workplace. Its medical devices enhance lives while the environmental business helps improve food, water, and air quality.

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Sales for its largest US business, generating around two-fifths of sales, rose by almost a third on a headline basis to £364 million. Stripping out acquisitions and currency movements left the rise nearer to a tenth.  

Bolt-on acquisitions year-to-date totalled three at a cost of up to £238 million and spread across all three of its industry sectors. Two came in North America and one in Europe.  

A full-year trading update is likely to be made in March. 

ii view:

Tracing its history back more than 100 years, Halma today employs over 7,000 staff across more than 20 countries. Safety products generate its biggest slug of sales at around two fifths, with the balance split relatively evenly between medical devices and environmental and analysis related products. Its customers include utility companies, healthcare providers, commercial and public buildings, and energy and resource corporations. 

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For investors, a highly uncertain economic outlook including rising interest rates and a cost-of-living crisis, cannot be ignored. Elevated costs generally for industry also warrant consideration, as does an estimated forward price/earnings (PE) ratio above the 10-year average, suggesting the shares are not obviously cheap. 

On the upside, diversity of both product and geographical region are enjoyed, with ongoing bolt-on acquisitions continuing to add growth. Halma’s dividend record is also enviable given more than 25 years of annual consecutive payment increases.

Quality and consistent growth do not come cheap and, for now, and while some caution looks sensible, Halma’s robust defensive qualities continue to justify its place in a diversified long-term focused portfolio. 

Positives: 

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

Negatives:

• Uncertain economic outlook
• Valuation not obviously cheap

The average rating of stock market analysts:

Hold