As is its way, Halma revealed an acquisition on the day of its full-year results this month. The latest company to be gobbled up by this highly takeover-friendly FTSE 100 company — known for making smoke detectors — was Ampac Group, a supplier of fire and evacuation systems in Australia and New Zealand.
Again in keeping with its tradition, Halma’s fourth deal in 12 months was relatively inexpensive at £74 million and will be slotted swiftly into one of its four divisions, in this case infrastructure safety. And, needless to say, in the accompanying set of annual performance figures, revenues, profits and the dividend were all healthily on the up — and the shares rose.
Halma dates back to 1894, when the Nahalma Tea Estate Company began operating in Sri Lanka, but the investment and industrial holding company that it is today was created in 1956, when it changed its name. Listed on the stock exchange in 1972, the company grew via acquisitions, joining the FTSE 100 in December 2017, where it is now valued at just under £7.9 billion.
Each of Halma’s numerous business activities is connected by the themes of safety and hazard detection. The largest of its four divisions is infrastructure safety, which produces the smoke detectors and fire extinguishing systems for which it is known but also makes motion sensors and radars, including those used in tunnels and airports.
The medical division manufactures products from blood pressure monitors and eyecare equipment to electronic locator tags for hospitals. The environmental and analysis unit makes monitors, probes and sensors for water and gas; and the valves, vents and locking systems produced at the smallest division, process safety, are used in hazardous industrial locations such as oilrigs.
Growth at all of the businesses clearly benefits from a healthy run of acquisitions, but is impressively strong, nonetheless, generally coming in at double-digit levels in recent years. Signs of a blip in process safety last year, though, prompted management to execute a swift rethink of the M&A strategy and a minor reorganisation that it says has quickly put it back on track.
Part of the momentum, of course, comes from the long-term structural growth that Halma is locked into. The emphasis on safety and detection in corporate and industrial life can only deepen, for example, with the need for the monitoring of water quality and the world’s desire to ensure its health, increasingly through the private sector.
Yet part of it also comes from the group’s clearly disciplined approach, to M&A in particular. Sensibly, rather than insisting on absorbing a newly acquired company into a given division, Halma is as likely to retain the existing management and brand and to let the business continue to trade as a standalone entity.
There is a niggle and it is the valuation. Halma shares, down 15p, or 0.7 per cent, at £20.56 yesterday, trade for just under 36.3 times Numis’s forecast earnings and for a dividend yield of an extremely modest 0.8 per cent.
Still, the shares seem unstoppable. When this column last recommended holding Halma for the long term at the beginning of February, the price stood at £14; that means the shares have increased by nearly 47 per cent in just under five months, dwarfing the 6.4 per cent gain in the wider FTSE 100.
As well as the organic growth potential in its markets, there is no sign that Halma is running out of options in M&A, notably in Asia and emerging economies. Investors who own the stock should keep it and those that don’t should consider buying if there is a weak run.
ADVICE Hold
WHY Showing its potential for both organic and acquired growth in attractive chosen markets, but not cheap
Premier Oil
It’s not easy to see beyond Premier Oil’s net debts of $2.3 billion, but manage that and there is plenty of potential on view.
The group, a constituent of the FTSE 250, was founded in 1934 as the Caribbean Oil Company to explore for and produce oil and gas in Trinidad. While it has interests in countries including Mexico, Brazil and the Falkland Islands, it is Premier Oil’s activities in the waters around Britain that warrant the most attention. Its big hope is Catcher, the North Sea oilfield it operates and co-owns with Cairn Energy. Building the floating platform needed to extract and store oil at the field, against a backdrop of falling prices, took Premier Oil’s debt burden to a peak of $3 billion in 2016.
With production at Catcher beginning in December 2017 and rising steadily ever since, the field has started to pay its way. This is shown by a $400 million reduction in debt last year and a further $350 million or so expected to come off this year, after which its leverage will reach more conventional levels.
Catcher produced an average of 66,000 barrels of oil a day last year, underpinning a record year of output at more than 80,000 barrels daily and making it possible for the company to lift its forecast last month for expected production this year. After suffering losses for the previous two years, the field also helped Premier Oil to turn a pre-tax profit of $158.2 million last year.
Premier Oil’s fortunes, and the performance of its shares, are heavily linked to the oil price, which dictates the company’s cashflow generation and ability to pay off debt. Any price above $45 a barrel is positive — and Brent crude was trading up 51 cents, or 0.79 per cent, yesterday at $65.37.
Other projects also make the company potentially attractive to investors that are positive about the future for conventional energy. These include the Tolmount gasfield in the UK’s southern gas basin and the Zama oilfield in Mexico.
The shares, up ¼p, or 0.2 per cent, to 74½p yesterday, pay no dividend and are unlikely to while the debt remains high. They are very cheap, however, trading at only 3.9 times Jefferies’ forecast earnings, making them a risky “buy” to watch closely.
ADVICE Buy
WHY Debts are falling fast and projects coming on stream are falling
