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May 25, 2022

HLMA
Investment Type
Mid - Cap
Risk Level
Action
Rec. Price ($)

 

HLMA Details

Halma PLC (L: 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

Enhanced Capabilities in Environmental Monitoring

In an effort to boost its environmental monitoring capabilities, the company recently has acquired Deep Trekker Inc., based in Ontario, Canada. Deep Trekker’s submersible robots safeguard and provide critical infrastructure, including offshore wind farms and aquaculture, and facilitate ocean science and research.

Moreover, the acquisition of Deep Trekker provides new growth prospects across various markets, propelled by growing health, safety and environmental regulation, and endeavors globally to deal with climate change, waste and pollution.

Deep Trekker will operate as a standalone company under Halma’s Environmental & Analysis sector.

Healthy Acquisition Pipeline

The company undertook three more acquisitions in H2FY22, taking the overall count of acquisitions done in the year to date to 13 for an overall maximum value of £166 million. Its acquisition pipeline also stays strong across all three sectors, and it continues to control its portfolio of global businesses actively to drive strong growth and returns over the long term.

Trading Update

The company has made decent advancement in the second half of the financial year to date driven by its sustained advantage from its strong purpose, diverse portfolio, and buoyant, long-term growth drivers. Further, the benefit of its vital products and services have bolstered demand momentum across the group.

Geographically, the performance remained strong (on an organic constant currency basis) in the USA and the UK, and excellent growth was witnessed in Mainland Europe and Asia Pacific.

Organic Constant Currency Revenue Growth Across Sectors

Continued strong demand for its products and services, specifically for technologies that assist digital and data infrastructure, and for gas monitoring products, drove sustained robust organic constant currency revenue growth in the Environmental & Analysis sector in the second half of the financial year to date. Moreover, the Safety and Medical sectors are anticipated to deliver decent organic constant currency revenue growth.

Key Metrics

The company’s EBITDA margin and ROE grew sharply in FY21 over FY20. Further, the company’s current ratio improved to 2.31x in FY21 from 1.84x in FY20. Notably, Debt to Equity ratio improved to 0.33x in FY21 compared to 0.42x in FY20 and 0.34x in FY17, depicting reasonable leverage position of the company.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 32.25% of the total shareholding while the top four constitute the maximum holding.

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. Moreover, a reactive, inconsistent, and geographically fragmented policy and regulatory response, along with further reporting and governance requirements, also remain a potential risk.

Outlook

Driven by higher demand across the group, the board forecasts to report adjusted profit before taxation for FY22 in line with market consensus expectations. Additionally, the group expects to attain further sequential improvement in revenue in H2FY22 and achieve considerable revenue growth in FY22.

Notably, as part of its strategy, HLMA has enhanced investment in talent, as well as new product development, information technology and cybersecurity, to drive long term growth. The company has also incurred discretionary overhead costs to back its current strong growth. Resultantly, the company has guided full year return on sales to remain largely in line with historical levels.

Besides, the company is scheduled to release its FY22 results ending 31 March 2022 on 16 June 2022.

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

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

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 decent growth across the sectors and all major regions in the second half of the financial year to date, and a strong financial position.

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 closing market price of GBX2,173 per share as on 24th May 2022.

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


Disclaimer-

Kalkine Equities LLC provides general information about companies and their securities. The information contained in the reports, including any recommendations regarding the value of or transactions in any securities, does not take into account any of your investment objectives, financial situation or needs. Kalkine Equities LLC is not registered as an investment adviser in the U.S. with either the federal or state government. Before you make a decision about whether to invest in any securities, you should take into account your own objectives, financial situation and needs and seek independent financial advice. All information in our reports represents our views as at the date of publication and may change without notice.

Kalkine Media LLC, an affiliate of Kalkine Equities LLC, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.