For the year ending March 2023, Halma expects underlying pre-tax profit to meet analyst expectations of around £359.9m, which would be 13.8% ahead of last year.
Ignoring movements in foreign exchange rates, organic revenue has grown across all sectors and regions. Within that, the USA and Mainland Europe have been the strongest performers. Meanwhile cash generation has improved in the second half.
It's been a record year for acquisitions and Halma sees a promising deal pipeline across its focus areas of Safety, Environment and Health.
As previously announced, Marc Ronchetti will take over from Andrew Williams as Group Chief Executive on 1 April 2023.
The shares were broadly flat in early trading.
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Our view
Halma's a mash-up of around 45 businesses working to provide technology solutions in the safety, health, and environmental markets. Once a business is identified and acquired, a host of support functions are made available to help propel the next stage of growth. Each business is managed by its own board, allowing tailored decisions to be made on a business-by-business basis.
Halma's differentiated business model, geared toward non-discretionary and sustainability related demand, offers exposure to some resilient long-term growth drivers. These include increasing demand for healthcare, tighter safety regulations, and growing global efforts to address climate change, waste and pollution.
Strong demand doesn't always equal excellence in business performance. But Halma has shown itself to be a safe pair of hands, and is on track to deliver its 20th consecutive year of record profits. This provides some comfort that it can prosper even in a challenging economic environment, but there are no guarantees.
However, the business is facing some headwinds, not least on the inflated cost side. This pushed operating margins in the first half of the year down from 2021 highs, to 17.3%. Though, margins more broadly remain ahead of the wider industry.
Cash conversion over the first half of the year was lower than the 90% targeted, at 63%, as inventory spend increased to support supply chains. While it's something to keep an eye on, we're pleased to hear cash generation has improved over the second half.
That's important because one of the first things we look at in a buy-and-build business model is its ability to throw off free cash flow. Buying businesses isn't cheap, and if it can be funded by internally generated cash, it's much more sustainable. Halma shows no sign of slowing down its acquisition spree, and this has required some external funding. At the half year point net debt was up 78% to £500m. At 1.2x this year's forecasted cash profits, the balance sheet doesn't look too stretched. But it's a metric we'll be closely monitoring going forward.
Given the promising deal pipeline, we don't currently see much scope for Halma to increase the percentage of profits it pays out to shareholders. That's just under 30% based on market forecasts. Of course, this can't be guaranteed. With a yield of 1.1% the investment case is biased more towards capital growth than income.
All in, we're supportive of Halma's business model and growth drivers. But we aren't alone, the group trades on a price-to-earnings ratio of 25.6. That's come down from its pandemic highs, below the longer-term average but still ahead of the wider sector. There's plenty of pressure to deliver.
Halma key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.