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Halma - record performance, margin outlook a touch weaker

For the year ending March 2023, Halma reported record full-year revenue of £1.9bn, up 21.5%.

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Halma reported record full-year revenue of £1.9bn, up 21.5% with broad-based growth. In the mix, there were benefits from the weakness in sterling, and recent acquisitions - 8.1% and 3.2%, respectively. Organic revenue growth, ignoring exchange rates, was 10.2%.

Underlying profit before tax grew 14.2% to £361m, largely due to higher revenue which was somewhat offset by higher finance costs and supply chain disruption. That reflects organic growth, ignoring exchange rates, of 3.1%. There were also benefits from the weakness in sterling and acquisitions - 9.0% and 2.1%, respectively.

Cash conversion improved in the second half, with free cash flow for the year of £232m - up 9%. Record levels of investment meant net debt more than doubled to £597m, 1.38 times cash profit (EBITDA).

In the coming year, the group expects to deliver "good" organic revenue growth, ignoring exchange rates, with a small uptick in profitability.

The board has proposed a final dividend of 12.34p, giving a total dividend for the year of 20.20p - up 7%.

The shares were down 5.3% in early trading.

See the Halma share price, charts and how to trade

Our view

Halma, a mash-up of around 45 businesses working to provide technology solutions in the safety, health, and environmental markets, delivered record full-year record and profit. Headline figures were somewhat flattered by a weaker sterling, meaning its overseas income was worth more. Looking under the hood, revenue was above expectations, but there was some weakness in margins due to supply chain disruptions, particularly in the safety sector.

Looking ahead, 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%, which is likely why shares were down in early trading.

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, delivering 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.

Cash conversion over the first half 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 see cash generation back at target levels 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; if it can be funded by internally generated cash, it's much more sustainable.

Halma shows no sign of slowing down its acquisition spree, requiring some external funding. Net debt has more than doubled over the year. At 1.4x cash profits, the balance sheet looks manageable. But it's a metric we'll be closely monitoring going forward.

Given the promising deal pipeline, we don't see much scope for Halma to increase the percentage of profits it pays out to shareholders. Currently just over 30%. Of course, this can't be guaranteed. With a yield below 1%, the investment case is geared 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 29.7. 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.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 15th June 2023