Halma PLC (LON: HLMA) is a global group of life-saving technology companies. The company provides innovative solutions to various key problems facing the world currently. The company has more than 7,000 people over 20 countries and has significant operations in the UK, Mainland Europe, the USA, and Asia Pacific.

Record Results in H1FY22 (For the Six Months Ended 30 September 2021)

• HLMA delivered a record revenue and profit in H1FY22 with a revenue growth of 19% to £737.2 million (2020/21: £618.4 million). This was driven by significant recovery in demand in those end markets most impacted by lockdowns in H1FY21.
• Adjusted profit before taxation increased robustly by 27% to £154.9 million (2020/21: £122.0 million), supported from robust gross margins as well as a slower-than-expected return in variable overhead costs.
• Resultantly, return on sales came in higher than expected at 21.0% (2020/21: 19.7%). This included an exceptionally strong performance in Q1FY22, with return on sales of 22.5%.
• Statutory Profit before Taxation also grew strongly by 74% to £167.5 million (2020/21: £96.3 million).

Exhibit 1: Performance Trend

Source: Analysis by Kalkine Group

Growing Through the Inorganic Route

In a move to expand its future growth opportunities as well as geographical presence, the company has completed ten acquisitions in H1FY22, for a maximum total consideration of £107 million (on a cash- and debt-free basis), in core and adjacent markets and these were broadly spread across all three sectors and four major geographical regions. Further, it holds a healthy acquisition pipeline across all sectors. Recently, it has acquired International Light Technologies, Inc. (ILT) for its Environmental & Analysis sector business, Ocean Insight. In November 2021, the company has acquired Infinite Leap, Inc. for its Medical sector business, CenTrak, which is engaged in delivering real-time location services for healthcare facilities.

Further Advancement in Sustainable Growth Model

The company’s Sustainable Growth Model is driving success, including its focus on global niche markets with long-term growth drivers. This model is focused on delivering constantly solid growth and returns with a positive impact in the markets it serves and beyond. Its strong purpose and culture, along with its portfolio and geographic diversity, and agile business model underpin better performance in varied market conditions and maintain growth and returns over the longer term.

Key Metrics

The company’s EBITDA margin increased to 25.8% in FY21 compared to 23.9% in FY17 and 24.7% in FY20. The ROE also improved to 17.7% in FY21 versus 17.4% in FY20. The current ratio increased significantly to 2.31x in FY21 from 1.84x in FY20. The increase in the current ratio indicates that the company possesses better capabilities to meet short-term obligations. However, the company’s cash conversion cycle rose to 119.2 days in FY21 from 110.3 days in FY20.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 32.71% of the total shareholding while the top four constitute the maximum holding. Notably, Capital Research Global Investors and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 9.97% and 6.39%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

The company is exposed to the risk of business and supply chain interruption or additional costs as physical climate impacts increase. Moreover, a reactive, inconsistent, and geographically fragmented policy and regulatory response, along with further reporting and governance requirements, also remain a potential risk. The company is also prone to the risk of lacking required knowledge and skills to identify, evaluate, pursue, and deliver on low carbon opportunities relative to competitors.

Outlook

The company’s outlook for FY22 remain unchanged, notwithstanding the impact of variable overhead costs and sustained bearing on revenue, costs and working capital from increased supply chain, logistics and labour market disruption. HLMA expects more typical rates of revenue growth and return on sales in H2FY22, with the latter to remain in line with historical levels. Further, the company’s strong balance sheet along with sustained cash generation reinforces its continuing investment in future organic growth, thereby, providing the company with significant capacity for acquisitions, and assist its progressive dividend policy. Notably, the company holds a healthy acquisition pipeline across all three sectors and remained focus on attractive, high-quality businesses to improve its existing market strengths as well as to enter emerging market opportunities.

Valuation Methodology: Price/EPS Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Stock Recommendation

The stock has been valued using a Price/EPS multiple based relative valuation (on an illustrative basis) and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to peer average Price/EPS multiple (NTM basis), considering its record results in H1FY22 and strong growth across its entire sectors and all major regions and a strong balance sheet.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the current market price of GBX 2,350 per share (as on 2nd March 2022 at 08:00 AM GMT).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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