|
UBS said it finds it ‘harder to see the organic upside’ for Halma PLC on Tuesday, as it cut the stock to ’neutral’ from ’buy’.
Halma shares dropped 4.8% to 2,161.47 pence each in London on Tuesday. UBS slashed its target price to 2,470p from 3,300p.
Earlier this month, the Buckinghamshire-based safety equipment maker reported that in the half-year, revenue totalled £875.5 million, up from £737.2 million the previous year.
Pretax profit, however, dropped to £145.5 million from £167.5 million. Halma said this drop was due to a gain on disposal of £34.0 million in the first half of its last financial year, which wasn’t repeated. Excluding this gain, it noted, pretax profit was up 9%.
‘Halma has been successful in delivering against its 5% target for organic growth (revenue and profit), but has underperformed against its target, albeit modestly, for acquisitive profit growth, with a 10-year average of 4.3% and 5-year average of 3.6%, against a 5% target,’ UBS noted.
UBS noted that Halma’s growth has previously been well-balanced between organic and M&A. However, it forecasts a moderation in organic growth, which would require larger M&A activity. Such activity tends to carry larger integration risks, the Swiss lender said.
‘Assuming that the long-term targets are not changed, and against a backdrop of moderating organic growth, we see it as plausible that larger [mergers & acquisitions], and its concomitant risks, are required in order to achieve targeted >10% EPS growth,’ UBS said.
Halma’s valuation will ‘follow the macro’, UBS contended, which could act as a catalyst for its valuation.
‘Halma’s UK exposure is the greatest in our coverage and any weakness in UK Infrastructure markets may weigh on sector margins, but we do not see this as a meaningful impediment to Halma’s quality status,’ the Swiss bank said.
It noted the firm’s revenue is weighted towards the Safety sector, and within that sector towards Infrastructure Safety. Infrastructure Safety has delivered margin growth in the past five years, whereas the old Process Safety segment saw a fall in margins, UBS said.
‘We note that the UK has actually been one of the more stable regions for Halma, right up until [the first half of 2021] when it was the worst performing region, and [the first half of 2022] when from that low base it was the highest growth region,’ UBS added.
Back in June, Halma said Andrew Williams has decided to retire as group chief executive on April 1 of next year, after 18 years in the role and 29 years with the company. In his stead, the firm promoted its Chief Financial Officer Marc Ronchetti to chief executive designate.
UBS maintains Halma is likely to stay the course under its new leadership.
‘The growth strategy of acquiring and growing businesses in global niches in safety, health and the environment looks set to continue,’ it said.
‘We have no reason to suspect that Halma’s strong M&A discipline will falter, our view is merely that the visibility on a level of earnings growth historically delivered is at this moment less clear,’ UBS concluded.
UBS expects a 20 basis point margin improvement between 2023 to 2025, which is below consensus of a 50 basis point rise.
The lack of margin progression leads UBS to prefer fellow FTSE-100 thermal energy management and pumping company Spirax-Sarco Engineering PLC, which it raised to ’buy’ from ’neutral’. It set a target price of 13,700p, raised from 11,110p.
Spirax-Sarco shares closed down 0.9% to 11,220.00p in London on Tuesday.
Copyright 2022 Alliance News Limited. All Rights Reserved.
|
