As a business, Halma is all about safety, but how secure a bet are the shares? The strength of the fire alarm and security technology specialist’s stock helped to propel it into the FTSE 100 just over a year ago and, as it stands, its position as a blue-chip company looks solid, albeit not unassailable.
The market values the shares, down 2p at £14 yesterday, at a rich 34.4 times last year’s earnings for a yield of barely above 1 per cent. That is a pretty bullish valuation for a dividend payout well below inflation. Is it justified?
Halma started life in 1894 as The Nahalma Tea Estate Company, operating in what is now known as Sri Lanka, but was then Ceylon. Having ditched its tea and subsequent rubber interests, Halma became an industrial investments company, listing on the London Stock Exchange in 1972 and subsequently pursuing a number of acquisitions.
In its modern form, Halma owns and operates about 40 businesses in more than 20 countries and has more than 6,340 employees. Valued at £5.3 billion, in its most recent financial year it made pre-tax profits of £213.7 million on revenues of more than £1 billion.
Its four divisions are linked by safety and hazard detection, of both people and assets, mainly property. The largest unit by revenue is Infrastructure safety, which makes sensors including the smoke detectors for fire alarms for which Halma is best known. The Medical division makes devices, including for spotting cataracts and monitoring blood pressure and hypertension. The environmental and analysis division develops and manufactures products to identify problems such as gas or water leaks and the smallest part, process safety, makes detection materials such as pressure valves used in oil rigs and other hazardous industrial locations.
Halma’s strategy is pretty punchy: to double revenues and profits every five years, through organic growth and acquisitions and without having to seek external funding or compromising the dividend payout to investors. Through a roughly 50:50 combination of deals and underlying sales growth, it has done pretty well, improving revenues, profits and the dividend every year for more than a decade.
Taking as a snapshot the five years to the end of March, Halma lifted annual revenues from just under £620 million to nearly £1.1 billion and grew pre-tax profits from £122.3 million to almost £172 million. Its share price over the same period more than comfortably doubled. Last year’s dividend, of 14.68p, is 40 per cent higher than it was in 2013.
The attractive thing about Halma is that many of its markets are locked into long-term structural growth. The desire for hazard protection in industry and safety in business will not go away, while the need for medical monitoring devices can only grow as the world’s population ages.
It has embraced the need to respond to the pace of technological change in its markets rather well, looking at forming partnerships with other companies that have technology prowess that it would want to use rather than buy. It has also been exploring ways of commercialising the technology behind its products; whether, say, its motion safety detectors in lifts and water pipes can generate data it could sell on to others.
Halma has leading positions in its main markets, supplying sensors to 50 per cent of the smoke detectors used in the world’s offices and public buildings. Its lofty rating may mean more short-term value can be found in other companies in the sector but any current owner should part with their shares unwillingly.
ADVICE Long-term hold
WHY Consistent and sustainable growth in revenues, profits and dividend, offset only by its premium valuation
Inchcape
There is an argument that the City doesn’t quite get Inchcape, in part thanks to one awful word — distribution — which doesn’t really tell anyone what it does.
Because Inchcape operates as a retailer of new and used cars, both in the UK and Russia, it is among those companies whose shares either bounce or slide each time the industry publishes figures about vehicle production or sales.
Given the weakness of the car-buying market in Britain over the past year, the recent moves have tended to be downward. Yet selling motors from its forecourts accounts for just 10 per cent of Inchcape’s profits; the remaining 90 per cent comes from “distribution”. So what exactly is it?
Inchcape, named after a lighthouse off the coast of Arbroath, Scotland, is a former family-owned business founded as a merchanting partnership in 1847. By the time of its listing on the stock market in 1958 it had became an industrial conglomerate. After a series of crises, it was split up and the car dealership kept the name.
Until the arrival of its present chief executive, Stefan Bomhard, in 2015, Inchcape mainly employed the traditional motor retailing model: pay the manufacturer a pretty-much fixed price for stock, stick it on the forecourt and take the margin hit if you have to discount it to get the sale. This is how leading manufacturers want it to be in their mature markets, including the UK.
Mr Bomhard prioritised distribution, which effectively means overseeing the vehicle trading process in a country, controlling the style and quantity of stock orders, importing, marketing, pricing and managing the network of dealerships, some of which Inchcape might own.
This model moves risks such as misreading demand and logistical surprises to Inchcape, but is far more profitable. Inchcape’s trading margin in Asia, say, where it is the exclusive distributor for Toyota, Lexus and Suzuki, is 10.9 per cent; in the UK, where it is a retailer, it is 1.5 per cent.
Weaknesses in Australia and the UK and adverse currency movements mean Inchcape’s profits this year will probably be down, but the outlook for 2020 is rosier. The shares, off 13p to 573p, carry a low rating, trading at 8.9 times Numis’s forecast earnings for a yield of 4.7 per cent.
ADVICE Buy
WHY Highly cash-generative model undervalued but works
