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Rare opportunity to play Halma
Mersham-based Halma (HLMA) will be keen to redress the balance between buyers and sellers after a spell in the grip of the bears.
In three months to early January the share price slid 21% to 887.5p, its lowest level in almost a year. That slump has left many City analysts baffled; certainly half year results to 1 October 2016 were typically robust.
STILL TIME TO GRAB A DISCOUNT
The recovery already appears to have been kick-started; the stocks has staged an 8% rally to 955.5p. But there is still time to get in on this high-quality, and relatively rare growth and income story in the technology space.
Halma is a global manufacturer and seller of a wide range of equipment largely demanded by health, safety and environmental rules. This includes hazard detectors, sensors and assorted environmental protection kits. The approach allows the FTSE 250 company to consistently perform almost regardless of the economic cycle.
Organic growth is supplemented by carefully selected, bolt-on acquisitions. Halma is very careful in how it chooses its business areas, seeking resilient growth drivers based on advances in safety regulations, ageing and urbanising populations, and other demographic trends.
It also buys businesses that generate strong returns and which it can help to develop and spread into new geographic markets. The model works. Yet finding a continual stream of buyout targets capable of moving the earnings needle appears to be one of the key issues for sceptics.
WELL DEFINED AND SUCCESSFUL STRATEGY
‘Halma has a well-defined and highly successful strategy of focusing on structurally growing niche markets driven by increasing safety, health and environmental considerations,’ says Numis analyst Nick James.
Interestingly, the analyst also notes how consistent the company has been over many years in maintaining operating margins in the low 20s, ‘which benchmarks well against the peer group,’ he says. The sector average is 13.2%, according to Morningstar data.
‘This has produced a virtuous circle of reliable growth and cash generation that pays for the next stage of investment, and for an unrivalled record in dividend growth,’ point out Investec analysts Michael Blogg and Chris Dyett.
Halma has increased the dividend by more than 5% every year since 1979, a staggering achievement. It’s also worth noting the accelerating trend of the payout, as illustrated in the table.
Based on consensus forecasts Halma is trading on a price to earnings (PE) of 22.2-times next year’s 43.1p earnings per share (EPS). That’s a two year low for the PE and we side with the majority bullish view.