Halma Earnings: We Anticipate Margin Compression in Fiscal 2023 To Be Temporary

Narrow-moat Halma’s HLMA pricing power in products, which benefit from structural growth drivers was fully evident during fiscal 2023. Organic revenue growth of 10% was broad-based across operating segments, slightly ahead of our expectations. Bolt-on acquisitions remain a key component of Halma’s strategy, adding a further 3% growth (net of disposals) to its sales growth during the financial year. Supply chain issues within the group’s safety segment were the main cause for the decline in its profit-before-tax margin by 120 basis points to 19.5%, below our 20.2% estimate. Management guided for the profit-before-tax margin to increase to approximately 20% during fiscal 2024, which we expect will be likely given the wider availability of components. We reiterate our GBX 2,310 and view shares as fairly valued.

Pricing contributed 4% to Halma’s reported revenue growth of 21%, which also benefited from a larger-than-usual order book heading into fiscal 2023 due to supply chain constraints, as well as favorable currency translation. The current order book remains strong and order intake is ahead of the prior year, which will support robust growth heading into fiscal 2024. Higher interest rates will not detract from Halma’s ability to pursue acquisitions due to its healthy balance sheet and strong cash conversion, which is expected to exceed 90% during fiscal 2024. We expect Halma will be able to maintain its pricing power even as raw material costs decline, which will support its profit-before-tax margin returning to 20%.

Halma raised its dividend by 7% to GBP 0.20 per share, continuing its record of delivering 44 years of dividend growth above 5%.