Halma has reiterated full-year guidance in a short trading update, expecting to deliver "good" organic revenue growth and return on sales (pre-tax profit margin) of around 20%. Revenue and profit are expected to be slightly weighted toward the second half, in line with pre-covid trends.
Order levels are ahead of the prior year, with Safety and Environmental & Analysis as the two growth drivers. Healthcare is seeing lower order levels as customers reduce inventory and face their own cost pressures.
There have been three acquisitions over the first half, for a total consideration of £80m. The prior year saw record spend, totalling close to £400m. Management says it has a "healthy" deal pipeline across all three business sectors.
The shares fell 1.5% in early trading.
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Our view
First half trading looks to be progressing broadly as expected at Halma, with guidance reiterated in its half year trading statement. We expect to see performance slightly weighted towards the second half, in line with more traditional conditions seen before Covid.
At the start of the current financial year, the outlook for profitability was a little lower than markets were expecting, with return on sales (a measure of profit margin) expected around 20% for the coming year - analysts had pencilled in 20.4% at the time. That 20% marker is key, and it's good to see things trending in line.
Halma's essentially a mash-up of around 45 businesses working to provide technology solutions in the safety, health, and environmental markets. This 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.
Halma has shown itself to be a safe pair of hands, recently delivering its 20th consecutive year of record profit. This provides some comfort that it can prosper even in a challenging economic environment, but there are no guarantees.
Acquisitions are key to the strategy, so cash conversion (the level of operating profit backed up by cash) is essential. Following a brief dip in the first half of last year, things look to have bounced back and we should see it above the 90% target this year. One of the first things we look at in a buy-and-build business model is its ability to throw off cash flow. Buying businesses isn't cheap; it's much more sustainable if it can be funded by internally generated cash.
Progress on deals over the half has lagged last year's record levels. There's a lot to do over the second half if Halma wants to get anywhere near its ongoing target of generating 5% growth from new deals. That was just about reached last year by spending nearly £400m, but with only £80m committed so far this year, there's a decent gap. We don't want Halma to buy for the sake of it, but we'd like to see more progress on the "promising" pipeline over the second half. Net debt more than doubled last year, but still looks manageable at 1.4x cash profit last we heard. Add in good cash flow, and there's plenty of room for investment should the right opportunities arise.
All in, we're supportive of Halma's business model and growth drivers. But we aren't alone, and while the valuation has come down from its pandemic highs, it's still ahead of the wider sector. There's plenty of pressure to deliver.
Halma key facts
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