Investment Thesis:
- High quality company with a history of earnings and dividend growth.
- Management is looking to double EPS every five years. HLMA’s group earnings growth model is driven by organic and acquired growth.
- HLMA earnings are defensive as HLMA is exposed to attractive end markets which are niche and regulated in some shape or form – such as safety, medical and infrastructure.
- HLMA consists of a strong diversified portfolio of companies (currently 45 companies).
- Strong management team with strong corporate culture.
- “Private Equity firm with a purpose” – the Company is not limited by a timeframe to exit positions.
- HLMA operates a decentralized operating structure with operating companies and management teams left to run their businesses.
- Scores well on ESG metrics – targeting a science-based emission target (1.5 degree-aligned 2030 target for Scope 1 & 2 emissions), a net zero target (scope 1 & 2 by 2040) and transitioning towards a circular economy.
Key Risks:
- Execution risk – specifically around acquired growth or the inability to source enough deals as the group grows larger.
- Deterioration in global growth or consumption.
- Turnover in senior management team.
Key highlights:
HLMA can be thought of as a private equity company with a purpose, having a highly sustainable financial model, which focuses on maintaining portfolio companies’ growth and returns over the longer term (management aspires to double the size of the Group every 5-6 years), while delivering performance in the shorter term, through a combination of acquisition, venture partnerships and organic growth.
- Strong top and bottom-line growth – Management prefers to be in markets delivering +3-5% year on year growth and invests in business that are typically one of top 3 players in their respective niches (market share can vary between 10-80% but on average market share across the group is 20%) which leads to strong top line growth, which combined with differentiated products leads to high gross margins (>60%) and strong EBIT margins (>20%).
- High return on capital – The Company remains capital light given it’s a final fixed assembler (don’t have huge production facilities with on average a production facility of 100-200 people) thus providing very high return on average capital across the group (70-75% return on average capital across the group and after intangibles and taxes its ~15% return on total capital in group).
- Strong cash flows making it self-funded – The Company has a self-funded model (doesn’t go to market for dilutive capital raise) and uses its strong cashflow (targets cash conversion of >90%) to first invest organically, and then to make further acquisitions to expand the addressable market and pay shareholder returns via dividends (+5-7% growth year on year.
Company Description:
Halma Plc (HLMA), listed on the London Stock Exchange, looks to acquire, and grow businesses in niche markets with a global reach. The Company focuses on markets such as medical, safety and environment. Management believes the earnings profile of these markets have a high degree of defensibility and long-term growth drivers. The Company is not like a Private Equity firm which looks to acquire businesses, reduce costs (to improve earnings profile) and then sell within a 5-year timeframe. HLMA looks to buy and hold companies over the long-term. They manage the mix of businesses in group portfolio to drive sustainable growth and returns over the long term. HLMA looks to acquire businesses to accelerate penetration of more markets, merge businesses where it markets sense, and exit markets if they become less attractive from a long-term growth and returns perspective.
(Source: Banyantree)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
