If Halma had the secret of its success locked away in a deposit box at head office, it would have to guard it extremely carefully. The FTSE 100 company in the business of all things related to safety delivered its latest set of record results today, prompting a round of analyst upgrades and a surge in its share price of as much as 12.5 per cent.
This column has been a consistent fan of Halma, probably best known for its smoke detectors, but has tended to recommend holding rather than buying its stock, largely because of the company’s rich valuation. With the price showing very little sign of slowing down, however, could it be that the group’s blowout first-half results mean that it reasonably deserves an upgrade?
Halma began life in Sri Lanka in 1894 as the Nahalma Tea Estate Company, changing its name in 1956 and becoming an industrial holding company. Having been listed since 1972 and a constituent of the FTSE 100 for two years as of next month, it has expanded steadily through smaller acquisitions, which have helped to take its market value to just shy of £7.2 billion.
In fact, it may have come as a mild surprise to some shareholders that Halma didn’t use today’s first-half results to spring its latest acquisition on them. It did, however, remind investors that it had completed three small deals in the first half — including the Australian fire and evacuation systems supplier Ampac — plus a further two since the end of September.
Ampac slots tidily into the infrastructure safety division, the largest by revenues and the producer of smoke detectors, fire extinguishers, sensors and radars. There are three other business units: the environmental and analysis division makes monitors and sensors for water and gas; the medical division manufactures products including blood pressure monitors; and the process safety arm makes valves and locks for use in dangerous industrial locations.
Investors were definitely taken unawares by the strength of today’s results, though, albeit pleasantly so. What they got was not just healthy increases in revenues over the six months to the end of September — by double digits in the case of the two biggest divisions — but also organic growth that provided reassurance that Halma is not relying on deals to keep going.
As well as a 7 per cent increase in the interim dividend, underpinned by an improvement in the return on sales, they were also told that Halma remains wedded to further acquisition deals worldwide, with gearing held at a highly sustainable level of less than its annual profits before tax and other items.
And so to the share price and the valuation metrics. Halma’s shares, which closed 163½p, or 8.6 per cent, higher at £20.62, have risen by 50 per cent since February, when this column recommended holding them. They are just 2 per cent higher than they were in late-June, when the column made the same call, however, largely driven by weakness before today’s results after some City analysts began to express their own worries about Halma’s valuation.
The shares are valued at 35.8 times Investec’s forecast earnings for a dividend yield of just 0.8 per cent; for any other company that kind of rating would have to be a no-no. Yet history shows us that this is a company whose share price keeps on giving and, based on the current health of trading, there is every indication that this will continue.
Those owning Halma shares should clearly keep them; those who don’t should hope for a moment of weakness, buy them and then sit on them too.
ADVICE Buy
WHY Highly impressive collection of businesses, keen approach to M&A, likely to continue to motor for some while yet
Rathbone Brothers
Having the City gossip about mergers and acquisitions in a company’s sector should, in theory, generate a favourable backdrop to its share price. In the case of Rathbone Brothers, though, heated talk about takeovers among wealth managers has done its stock price no favours whatsoever. The shares have lost more than 12 per cent of their value over the past two years, a time when leading players haven’t been shy about merging.
It’s true that Rathbone’s market is under pressure, but, in the face of intense competition and weak consumer sentiment, the company has been bearing up well.
Rathbone Brothers was founded as a trading business in Liverpool by William Rathbone in 1742. A specialist in financial management for more than a century and a member of the FTSE 250, the company manages money for charities as well as wealthy families and individuals, and it offers financial planning and a smattering of banking services.
With organic growth in customer funds hard to come by, the company is planning to extend the financial planning it offers and has been trying to appeal to the less well-heeled customer with a fairly basic portfolio management service.
It is also aiming to use its relationship with independent financial advisers to try to win more discretionary management mandates — a higher-fee area where it is in charge of the investment decisions.
Not only has the group stated its willingness to pursue acquisitions in a sector that is consolidating to create dominant players capable of dealing with more complex investment offerings and tighter regulation, but it has also done it, and successfully. It paid £104 million last year to buy Speirs & Jeffrey, a Scottish investment manager, which brought in £6.7 billion, and any further deals are likely also to be at this smaller end of the scale.
The shares, up 5p, or 0.2 per cent, at £21.35, carry a fairly rich rating, valued at 16.2 times Investec’s forecast earnings for a dividend yield of 3.2 per cent. The company and its metrics are respectable, but — not least because of the pressures on asset managers — are not tempting at this stage.
ADVICE Avoid
WHY Shares look fairly valued in a tough sector
