Author Topic: HLMA.L - Halma plc  (Read 2106 times)

Dynamic

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HLMA.L - Halma plc
« on: January 23, 2018, 09:30:41 AM »
Halma plc trades on the London Stock Exchange with ticker HLMA
Other tickers: HLMA.L OTCPK:HLMAF  OTCPK:HLMLY
Website: http://www.halma.com/

Potted description: Engineering conglomerate - multiple subsidiaries No 1 or 2 in lots of niches such as safety and asset monitoring where quality/performance trumps price. Long history of growing dividends and sound acquisitions made without over-paying. Good international exposure.

I think it's currently (as of January 2018) quite richly priced at 1,313 pence (GBX) = 13.13 GBP per share or $18.56 USD, giving it almost a 5bn market cap and about a 2.82% trailing earnings yield, but worth keeping an eye on in the long-run.

It's a high quality company with a great decentralised structure, good competitive moats in numerous niche businesses where quality and performance is far more important than price, has had consistently great ROIC and a sensible acquisition strategy and most of the time has carried little to no net debt. If purchasing again, probably in a distressed market, I'd be keen to ensure their debt is negligible before re-establishing a sizeable position.

I've previously held it for over 14 years (from Oct 2001 buying at a bargain price of about 134p (136p after costs), to Feb 2016 at 808p, collecting a very healthy and growing stream of dividends over that time that made for a sound Internal Rate of Return, though I squandered some of that in how I put the dividends to use, but still got over 13% CAGR on the capital appreciation alone). The total dividends over that 14.3-year ownership amounted to something like 121p per share (including about a 2-3% overall boost thanks to a UK 'dividend notional tax reclaim' that lasted until the end of 2003 in my ISA tax-free wrapper), or about 89% of my purchase price.

My purchase price, amid war fears after Sep 11th 2001 attacks offered a historic Free Cash Flow yield of about 8.5% and it had already amassed a 25-year+ history of growing dividends over 5% annually. My entry price recurred in early 2003 and I would have been sensible (knowing how I think now) to Value-Trade out of poorer companies selling near to IV and increase my position substantially, giving up on other shares that were only moderately undervalued at that time.

I only sold in Feb 2016 because Berkshire Hathaway was a screaming buy at $124 (1.23 x BVPS) and Halma was then trading at 28.8 P/E ratio (3.46% trailing earnings yield) and I'd already put my available cash into BRK.B. Since then Halma's foreign earnings have given a nice boost in depressed GBP currency and it's now on a 2.82% earnings yield (35.5 P/E), though BRK.B is still 20% ahead and I then value-traded more than my original Halma position out of BRK at $142 and into a 25% position in AAPL at $95 to even greater benefit (36% + dividends in outperformance of AAPL over BRK.B at present), helping me outperform the S&P500TR by 12.2% in 2016, so I don't feel I missed out by selling Halma at 808p.

I learned a lot about Halma plc on the Motley Fool UK Qualiport posts and the forums there, which are now closed, but I was recently able to find one decent post about it that was archived before their closure:

https://web.archive.org/web/20120519220741/http://www.fool.co.uk:80/qualiport/2000/qualiport000830.htm

That's a primer on Halma plc. The new boss is still doing well. Warren Buffett admired their approach and sent them a letter many years ago which they displayed on their Board Room wall. Buffett couldn't meaningfully invest due to market cap and takeover commission rules (have to make an offer if you hit 3%) but admired their disciplined acquisition approach, shareholder orientation, decentralized structure and competitive moats. I beileve Halma is still disciplined in acquiring companies to grow and is capable of a certain amount of organic growth too, where their high ROIC is very helpful.

A lot more was written in FoolUK Qualiport articles but it's hard to find now.

Annual Report and analyst presentations are useful, with focus on important fundamental metrics.

Halma remains on my watchlist and I'm subscribed to their investor email alerts.

When they make acquisitions (usually of private firms) they usually give enough information to judge at least moderately well that they're not overpaying. Often in recent years, the price they pay represents a yield on historic earnings exceeding 7% at the maximum price payable if all growth incentives are met (which presumably means significant earnings growth has then been achieved and the actual earnings yield is appreciably higher than 7%). From time to time I sanity-check their acquisition announcements and have never found cause to believe they overpaid.

Just today, I've found a pretty good write-up on Seeking Alpha by Stephen Simpson, CFA

https://seekingalpha.com/article/4139044-halmas-model-continues-drive-value-shareholders

I'd recommend reading that to decide if it's one to add to your watchlist of companies to consider when there's trouble in the air and prices become more attractive. It's certainly on mine and I'd gladly hold it again.


Dynamic

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Re: HLMA.L - Halma plc
« Reply #1 on: June 12, 2018, 01:27:55 AM »
Final Results are out for 2017-18. Another year of impressive performance, sustained dividend increase record, exceeeding 1bn revenue for the first time and entering the FTSE100 Index for the first time in Dec 2017, but the stock remains far too expensive for me to buy back in. It is actually up a fraction more than Berkshire Hathaway since I sold Halma at 838p in Feb 2016 and bought into BRK.B at $124, and I though Halma was a little pricey then, while Berkshire was very cheap.

The subsidiaries are fairly asset-light so the return on tangible capital employed is usually very good typically around 50%. This hasn't been reported in the main results announcements lately, but I look for it in the Annual Report and analyst presentations.

The company is a serial acquirer, paying substantial goodwill to buy good asset-light acquisitions, run with a high degree of autonomy at reasonable prices that should comfortably exceed their cost of capital. Return on invested capital (including historic goodwill) is well above their 12% target at a little over 15% and cost of capital is about 7.7%. This target rate seems to be reflected in their disciplined acquisition pricing.

Net debt is about 200-230mn with low interest rates - about 5% of market cap and 20% of revenues and close to the annual operating profit. The debt facility is sufficient to allow opportunistic acquisitions in the next 4 years, but otherwise they would expect to keep debt at around current levels.

Aside from the introduction of modest debt, and some seamless changes in key personnel over the years and adjustments to the sectors they serve, divesting their old power resistors business etc., the nature of the company seems very much the same as the one I bought into in October 2001 at 136p, ~8.5% FCF yield and about 3% dividend yield. They've starting talking about their cost-of-capital in the last decade or so, but seem to have retained a sound fundamental grasp on properly allocating shareholder capital.

At the right price, considerably higher than my 2001 entry at 136p but considerably lower than 1400p today, I'd certainly be keen to take on a sizeable weighting in Halma plc.

Dynamic

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Re: HLMA.L - Halma plc
« Reply #2 on: October 19, 2018, 01:41:57 AM »
Another bolt-on acquisition of Belgian Fire Control Panel maker Limotec bvba for 9.3 million EUR (8.2 million GBP) on a cash/debt-free basis. They only reveal last year's revenue 6.7 mn EUR so we cannot estimate earnings yield. Existing management will stay.

At 27th September, per their Regulatory News site, Halma's trading statement was that they were broadly in line with the Board's expectations, including constant currency growth in all sectors (US particularly strong, regionally), strong orders and a few small acquisitions and disposals. They also completed the gradual transition from the retiring Finance Director to the new CFO on 1st July. The H1 earnings release Apr-Sep is due 20th November 2018.

Looks like the business is still doing well, the Berkshire-like autonomous unit structure remains intact, and Halma is still compounding IV at a decent rate without taking on serious debt, but it's priced accordingly (if not more so with a trailing P/E of 31.9 at around 1300p GBX = 13.00 GBP), and I would need a much lower price to buy back in.

As a GARP holding I'd pay up to some extent, perhaps around 650-800p would entice me at present, and given its quality I'd be happy to take a 25-40% initial weighting in a concentrated portfolio if the value looked compelling.

My trading history in HLMA is roughly:

Oct 2001 war scare - bought HLMA at ~136p (8.4% FCF yield, about 3.5% dividend yield I think) feeling it offered much better inflation protection than cash, and a decent yield for the quality. This was fairly early in my investing career, but one of a few of my first trades at that time when I felt I understood valuation and margin of safety and was putting it into practice for the first time after early blunders.

In 2003 I didn't act on cheaper prices (~120p). I could have more than doubled my Halma position by trading out of my doubled-down Pizza Express position a year before that was taken private at only a little above my average purchase price. That's an error of omission. Halma had a much less price-sensitive clientele than Pizza Express, net cash, had increasing regulation as a growth driver, and a much lighter tangible asset mix and better diversity of industries and geographies and had great management making sound acquisitions too.

Feb 2016 sold out of HLMA at 808p (14.4 yrs, 28.8 TTM P/E). Must have collected about 80-90p in dividends per share so compounded at 13-14% Total Return IRR, though I frittered away some of those dividends in a dying local newspaper firm, while some ended up in Berkshire eventually. This was a Value Trade, using the proceeds from a fully-priced share to maximise my already enlarged position in Berkshire (BRK.B) at 1.2x projected 2015Q4 BVPS (1.234x last published BVPS) at $124-$125 USD.

My Halma sale price over 2017-18 earnings is now below a 20 ratio, partly from growth and partly from GBP's currency decline. The company structure is much the same, net cash is near neutral now, and the division structure and industry focus has shifted slightly, but with similar economic drivers. Dividends have continued their long history of 5%+ per year increases too.

If I'd just stuck with the HLMA->BRK.B trade, Berkshire's value in GBP would be about 26.8% ahead of Halma's today less about 3% for foregone dividends measured in GBP, so that Value Trade alone has mostly looked right for the past 2.5 years with only occasional periods when Halma has inched ahead by a few percent while Berkshire was cheap.

I actually Value Traded out of even more BRK.B shares than I'd bought with the Halma proceeds in May 2016 when an even better high conviction idea came along, but my 2 years holding Apple is another story. 2016, like 2001 was a great year for finding value buys, and good luck also played a big part, more than making up for a couple of mistakes that lagged the market.

Dynamic

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Re: HLMA.L - Halma plc
« Reply #3 on: January 18, 2019, 08:47:18 AM »
Another acquisition for $42.4 mn USD (32.6 mn GBP) is Wisconsin based Business Marketers Group Inc., trading as Rath Communications, a provider of emergency communication systems for Areas of Refuge in the USA. The price paid is on a zero cash/zero debt basis.

Another Halma news release where it's difficult to judge the price paid, as it's 2.7x last year's revenue with no indication of profit margins. I suspect it is a relatively high margin business driven by regulatory necessity. I suspect Halma's typical approach of providing autonomy to its subsidiaries will suit this formerly privately-owned business, whose management will presumably remain in place, much along the Berkshire Hathaway model.

Typically in recent years they have calculated their weighted average cost of capital and ensured that earnings yields on acquisitions exceed that return.

At a share price of 1414 GBX Halma remains on a trailing P/E ratio of around 38, so I'm not close to buying back in.