Halma (HLMA)

Hello,

I recently read a presentation by David Barber of Halma, who co-founded the company in 1972. It dates from 1997 but is still relevant today. It highlights (amongst other things) why a buy and build strategy works in practice to create shareholder value. This is partly why I personally believe HLMA is a quality business and may remain so over the longer term.

david-barber-halma-strategy-speech.pdf

(maybe start from page 4 because he initially refers to charts which aren’t provided).

Mr Barber believed that to create value for the shareholder, any company purchases should be;

  • paid for by internally generated cash.

  • a replica of one already owned by the purchaser (i.e. within the circle of expertise, knowledge and competence of the purchasing company)

  • a bolt-on or quasi bolt-on (i.e. smaller than the purchasing company, because large acquisitions carry with them a large amount of risk if things don’t turn out as expected).

  • likely to improve the quality as well as the quantity of earnings.

This contrasts starkly with the buy and build strategy of some companies I can think of, and it’s certainly something I will use as a filter in the future for ‘buy and builds’ in the future!

Just for context, Halma’s total return over 25 years is 13% and 10 years 26%, which is pretty staggering imo.

Co-incidentally I stumbled across a blog post by Chris Meyer (of ‘100-BAGGERS’ book fame) who puts the above (a little more eloquently) here;

How They Did It: Halma, Plc (woodlockhousefamilycapital.com)
Looking at all of the content in this blog, it seems like a blog worth following?

(In my search for compounders, and based on my research, I have purchased some HLMA shares, but of course they may crash tomorrow -who knows! :grinning: :grinning:)

Regards,

anon

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That speech is a great find! Thanks for sharing.

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Hi,

Today’s HLMA Half-Year results seemed to be good?

Record revenue and profit: revenue up 19%; 23% on an organic constant currency basis. Adjusted Profit before Taxation up 27%; 32% on an organic constant currency basis.

· High Return on Sales of 21.0% (2020/21: 19.7%) given robust gross margins with a slower-than-expected return of variable overhead costs.

· Statutory Profit before Taxation up 74%, including a £34.0m gain on the disposal of Texecom.

· Strong organic constant currency revenue and profit growth in all sectors and major regions; very strong growth in the UK and Asia Pacific, against weaker comparatives.

· Increased returns and investment: ROTIC of 14.9%, and R&D expenditure up 20%, representing 5.6% of revenue.

· Ten acquisitions completed in the first half and one further small acquisition completed since the period end; a healthy acquisition pipeline across all sectors.

· Solid cash conversion of 85% and a robust balance sheet supporting sustained investment in organic growth and acquisitions, and a 7% increase in the interim dividend.

Summary and Outlook

Halma made strong progress in the first half, delivering record revenue, profit and interim dividend, with substantial growth compared to both the first half of last financial year and 2019/20.

Our full year outlook is unchanged, despite variable overhead costs returning and continued impacts on revenue, costs and working capital from increased supply chain, logistics and labour market disruption. In the second half of the year, we expect more typical rates of revenue growth and Return on Sales, with the latter more in line with historical levels.

Our Sustainable Growth Model continues to drive our success, including its focus on global niche markets with long-term growth drivers. Our strong purpose and culture, our portfolio and geographic diversity, together with our agile business model enable us to perform well in varied market conditions and sustain growth and returns over the longer term.

The appointment of Dame Louise Makin as Chair Person may be a concern, because she was on the board of Woodford Patient Capital. (I suspect Woodford may not have listened to his board, however). She must know about growth companies, though, after BTG (where market cap increased from $150m to $4,200m)? Intertek grew a lot also, between 2012 and 2021 whilst she was on the board.

FTSE 100 stalwart Halma hires former Neil Woodford ally Dame Makin as chairman | Evening Standard

A bit worried about valuation - price to turnover chart below:

Maybe I should sell? Perhaps JDG, RSW and OXIG would be saner choices with lower ROOCE, but also lower price to turnover ratios. On the other hand, I do not have any pressure to sell for over a decade, so as long as it keeps churning out results like this, I may as well stay put:

LSE_HLMA

It raises the question how much should be paid for quality companies? For example, AUTO has an even higher 5 year average price to turnover ratio of 12x (ignoring the past year due to pandemic customer discounts), but a higher ROOCE…it’s a crowded trade for quality companies at the moment…

Regards,

anon

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About selling Halma, I have that debate with myself every year. There was a period about 2-3 years ago when the shareprice seemed to be flatlining and I sold a few shares. Since then, they have nearly doubled. The management seem quite adept at slipping ever so gradually into different areas, both geographically and in terms of technology. For what it’s worth, nothing in this set of results has led me to change my mind. It might not be compounding quite as fast as some companies but, for compounding, time in the game is arguably more important than the short term rate of growth

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Thanks Graeme.

I think I will hold on for now. HLMA does have defensive attributes, despite the valuation. They have flagged abit of short-term margin pressure, but I am not really a short term investor now I am getting old(er)!

Regards,

anon