Designs, manufactures & markets equipment for process safety, infrastructure safety, medical and environmental & analysis. Typical products include - fire detectors, gas detectors, water treatment systems, ophthalmic instruments and machine safety systems. I have a holding in my income portfolio (epic code: HLMA).
Halma announced their final results on Thursday last week with profit before tax (PBT) just short of the previous market consensus, see here for comment.
Growth in continuing operations saw revenue
up 9% to £676.5m and adjusted PBT up 9% to £140.2m. Organic revenue growth
at constant currency was up 6% and PBT up 5%. Diluted EPS was up 13.6% to
28.13p and the final dividend was increased by 7.1% to 6.82p, producing 11.17p for the full year an increase of 7.1% and making this the 35th consecutive year of dividend increases above 5%. The dividend is covered 2.52x by earnings and 2.14x by free cash flow (FCF).
FCF was again strong at £90.2m compared to £85.9m in the previous year. After dividend (£40.5m) & acquisition (£16.7m) payments out of FCF, net debt was reduced by £35.8m to £74.5m. This net debt represented just 15.3% gearing and the ratios of debt/EBITDA and OCF/Debt were equally strong at 0.4 and 160% respectively.
Halma performs well on most metrics with a ROE of 22.6% and a ROCE of 25.6% compared to a WACC of 9.8%. Over the last 5 years they have returned dividends and grown their book value per share (equity) by a compound 17.3% pa, backed up by FCF per share generation of 18.8% compound pa on the opening book value per share.
Halma does have a defined benefit pension scheme, but this has been closed to new membership since 2003 and by December of this year will be closed to future accrual. The scheme currently has a deficit of £36.8m so perfectly manageable and the company is currently paying £7m pa to clear the deficit.
The company achieved revenue growth in all territories, with China (obviously part of Asia Pacific) growing by 26% and now representing almost 7% of the Group. Management are targeting revenue from outside of UK, USA and Continental Europe to be 30% by 2015, as can be seen below it is currently at 25%:
Halma performs well on most metrics with a ROE of 22.6% and a ROCE of 25.6% compared to a WACC of 9.8%. Over the last 5 years they have returned dividends and grown their book value per share (equity) by a compound 17.3% pa, backed up by FCF per share generation of 18.8% compound pa on the opening book value per share.
Halma does have a defined benefit pension scheme, but this has been closed to new membership since 2003 and by December of this year will be closed to future accrual. The scheme currently has a deficit of £36.8m so perfectly manageable and the company is currently paying £7m pa to clear the deficit.
The company achieved revenue growth in all territories, with China (obviously part of Asia Pacific) growing by 26% and now representing almost 7% of the Group. Management are targeting revenue from outside of UK, USA and Continental Europe to be 30% by 2015, as can be seen below it is currently at 25%:
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There was revenue and profit growth in all four sectors, with Medical performing the strongest with a considerable contribution from acquisitions made in the prior year:
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*Profit is shown as: before amortisation of acquired intangibles, acquisition items, curtailment gain on DB pension schemes and profit or loss on disposal of operations.
Management in their outlook statement stated that "...Our proven ability to
achieve organic growth and regularly complete good quality acquisitions gives
us confidence that Halma will make further progress in the year ahead..." The year just ended was quiet on the acquisition front, with just one completed. I would expect this pick up again if they can find the right targets at the right price, indeed three acquisitions have been completed this financial year already and they state that the pipeline of potential candidates is good.
I have held Halma in my income portfolio since May 2007, but sold 87% of my holding in January 2011 as their valuation became stretched and the yield declined substantially, so they now represent just 2.5% of the portfolio. Over the seven years I have held them they have returned just over 15% compound pa. with the dividends not reinvested. With first class management running this company, I would expect a similar return over the next seven years.
The quality of the company is first class, but unfortunately for any new investment this is reflected in the valuation of the company, with an historic P/E of 21.3 and a prospective 20 for this current year and a below market yield of 1.9%.
On a discounted cash flow valuation I would place a fair value of about 530-610p (current price 600.5p) assuming FCF growth of 10-12% pa for 10 years, 3% in perpetuity and a discount rate of 10.7% (estimate of their cost of equity). Halma would have to grow their FCF by 15% pa for those first 10 years for today's price to be considered good value (this would produce an intrinsic value of 760p), this might be possible as their five year and ten year historic growth has been around 14% pa.
For me though the margin of safety on a conservative forecast, is insufficient for me to build my holding back up and the dividend return too small. A quality business, but while acquisitions have such a major call on their FCF, I can't see the pay-out ratio of FCF deviating much from their current 3 year average of 47%, so the yield is likely to remain sub-median.
I have held Halma in my income portfolio since May 2007, but sold 87% of my holding in January 2011 as their valuation became stretched and the yield declined substantially, so they now represent just 2.5% of the portfolio. Over the seven years I have held them they have returned just over 15% compound pa. with the dividends not reinvested. With first class management running this company, I would expect a similar return over the next seven years.
The quality of the company is first class, but unfortunately for any new investment this is reflected in the valuation of the company, with an historic P/E of 21.3 and a prospective 20 for this current year and a below market yield of 1.9%.
On a discounted cash flow valuation I would place a fair value of about 530-610p (current price 600.5p) assuming FCF growth of 10-12% pa for 10 years, 3% in perpetuity and a discount rate of 10.7% (estimate of their cost of equity). Halma would have to grow their FCF by 15% pa for those first 10 years for today's price to be considered good value (this would produce an intrinsic value of 760p), this might be possible as their five year and ten year historic growth has been around 14% pa.
For me though the margin of safety on a conservative forecast, is insufficient for me to build my holding back up and the dividend return too small. A quality business, but while acquisitions have such a major call on their FCF, I can't see the pay-out ratio of FCF deviating much from their current 3 year average of 47%, so the yield is likely to remain sub-median.
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