Halma: A quality compounder
Halma is a global group of life-saving technology companies, focused on growing a safer, cleaner, healthier future for everyone, every day. The company is a member of the FTSE100 and has market cap of over £9bn. The share price chart over the long term reads from bottom left to top right – why is that? We welcomed Charles King, head of investor relations to a ShareSoc/Yellowstone Advisory webinar to give an overview of the company. A recording of the webinar is available here.
The opening slide showed charts of revenue and profit growth over the last 10 years. Both have compounded strongly with sales growing 11% CAGR and profits at 12% CAGR, effectively meaning they double every 6 years. In total the group comprises 40 operating companies employing 7000 people across 20 different countries and selling into 50 countries. The businesses operate in three areas: Safety, Environmental and Health – all chosen as they have good long term growth characteristics.
One of their biggest businesses operates in fire detection across the US, Europe and the UK. Their fire detectors protect an area twice the size of Luxembourg to give an example of the scale of the business. Another example of the type of business they are in is leak detection where they provide technology that monitors leaks and water pressure helping to save their customers billions of gallons of water each year. Businesses that are acquired generally keep their name although they may describe themselves as a Halma Group company.
One of the things that came across in the presentation is that Halma has a very clear approach to everything they do and Charles walked through the various steps and stages that are important to the company. Halma has created a lot of value over the years and their approach to Value Creation has five components. The starting point is that everything must contribute towards a safer, cleaner or healthier world. The strategy is to acquire and grow companies in markets with good underlying growth characteristics. The individual businesses are given autonomy and are set challenging aspirational targets – namely to double profits every 5 years. As a group they are achieving this every six years. Finally there is a robust culture which is supportive, accountable and collaborative and allows the individual companies to manage their businesses.
Looking in more detail about how growth is achieved there are 3 components. At the core is the acquisition and growth of companies in strong niche markets. Added onto this is growth from “convergence” which is where they take good ideas and technologies from one or more of their portfolio companies and create new products for the same or new business segments. The third component is called “Edge” and is about investing in digital products that can disrupt existing business models and have the potential for large scale growth.
Whilst the Group has a decentralised approach the centre provides a number of services to the portfolio companies that help enable growth at the company level. Small, centralised teams provide advice and expertise on international expansion, finance, communications, M&A, digital skills, innovation and culture.
Looking at the financial characteristics of a typical Halma company they tend to operate in markets which may be niche but which have good growth drivers. They will generally have strong market and product positions, ideally being the number 1,2 or 3 in their respective markets. The businesses will also have low capital requirements. These financial characteristics deliver strong organic revenue and profit growth, high margins and a return on capital in excess of the cost of capital. They will generate strong cash flows and in turn leverage is kept low. This enables the businesses to invest in R&D and make bolt on acquisitions (growth is split 50:50 from organic and acquisitions) whilst also enabling strong dividends to shareholders. The dividend has grown by more than 5% a year for the past 40 years.
Back to the long-term charts in addition to the double-digit revenue and profit growth, R&D has grown from £20m back in 2010 to £71.8m in 2020, just shy of 6% of sales. Return on total invested capital has been consistently mid-teens throughout the period too.
The company reported interim results to Sep 20 in November 20 and has just released a trading update on 24 March . Performance has been impacted by Covid and sales and profits were both down 5% in the half year. Charles commented though that Q2 was stronger than Q1 and that stronger momentum has continued into the second half. The recent trading statement indicated the company was performing ahead of expectations and Charles announced that full year results to 31 March will be released on 10th June.
Finally, there were a couple of slides on the company approach to sustainability and their focus on “Social” in ESG. Go back a couple of years and there wouldn’t have been any companies reporting on this, so the direction of travel here is very clear. Increasingly, if they haven’t done so already, the large institutional investors will have clear policies on this and if companies cannot tick the appropriate boxes they won’t be included as part of their investable universe.
Questions at the end covered a multitude of topics including the impact of Covid, it’s been a negative but they are largely through it, to why do you pay any dividends given the strong returns achieved by keeping the cash within the business – it’s all part of good capital discipline and the first calls on cash generation are investment in the business. There was also a question on long term growth rates for the business and whether low teens was the appropriate number to use. We were reminded of the aspiration targets to double profits and revenues every 5 years which broadly points to mid-teens growth. Halma has come pretty close to delivering this consistently over many years and although it is harder to deliver the bigger you get, would you really want to bet against them continuing to deliver this given their track record?
A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact email@example.com