Flyover Stock: Halma plc
Flyover Stock: Halma plc
This successful serial acquirer with a 51-year track record is unknown to most investors outside the UK
Executive Summary:
Halma is a UK-based serial acquirer, focused on the safety, environmental and analysis, and healthcare sectors
Has grown its dividend by over 5% per year for over 40 consecutive years
Since 1983, Halma has completed 154 acquisitions and has a team of over 20 dedicated M&A specialists.
Aims for a 50/50 split between organic and inorganic revenue growth
I like to keep things simple … At the most basic level, we acquire great companies aligned to our Purpose and culture and expand their growth and positive impact over decades, this at a rate over and above what they could achieve on their own.
- Halma CEO Marc Ronchetti, 2023 full-year results presentation
The best way to build pattern recognition for great companies is to study as many as possible. So, a few years ago, I asked on Twitter:
One of the most mentioned companies was Howdens Joinery (HWDN.L), which I profiled here (full post available to free subscribers):
Another frequently mentioned company was Halma plc (HLMA.L). Despite living and working in the UK in 2010 and 2011, I had only vaguely heard of the company. I wish I'd paid attention, though, as the stock’s total return is 658% since the end of 2011.
Halma is a FTSE 100 constituent, so you may wonder how it classifies as a Flyover Stock. For one, most investors outside the UK are unaware of it or at least don’t know what makes it special.
Serial acquirers like Halma also fly under the radar of active investors because they can be, well, boring to cover. The companies’ products are themselves companies and you don’t have much transparency into their individual financials.
There’s nothing boring about Halma’s track record, however, which includes over 40 consecutive years of 5% annual dividend growth or better and 20 consecutive years of profit growth.
Business overview
Market cap: £ 8 billion ($10.2 billion)
Revenue TTM: £ 1.9 billion ($2.4 billion)
Net debt: £ 619 million ($787 million)
P/E (ntm): 25.3x
Dividend yield: 1.0%
Number of analysts covering: 11
All market data as of November 30, 2023
As mentioned above, Halma is a serial acquirer akin to Danaher, Roper, and Ametek. Like those peers, Halma shares have bested the S&P 500 over the last decade on a total return basis.
Why might that be? Most investors and analysts only assume M&A in their forecasts once the deals are announced or closed. Assuming no value destruction occurs in the deals, similar multiples are applied to larger revenue, earnings, and cash flow bases.
It’s true that lower rates also lowered the cost of capital for serial acquirers, but it also made competition for acquisitions more intense and drove deal prices higher.
Good serial acquirers have five things in common:
Repeatable system for creating value through acquisitions and divestments
Focus on niche markets with mission-critical and less cyclical products
Patient capital
Eschew bureaucracy
Excellent talent recognition and cultivation
The most famous of these systems is the Danaher Business System (DBS), formulated in the mid-1980s by the brothers Steven and Mitchell Rales. DBS used lean and kaizen-based principles popularized by Japanese manufacturing businesses like Toyota.
It surprised me that Halma beat the Rales brothers to the punch by a decade. Though Halma can trace its roots back to 1894 as a tea company in Southeast Asia, the current iteration took form in 1972 when David Barber and Mike Arthur began acquiring manufacturing companies.
Barber, who would lead the company as CEO for 20 years and retired as chairman in 2003, oversaw a near 38,000% return on Halma shares during his tenure. His 1997 speech "Delivering Shareholder Value" is a must-read and illustrates Halma's approach, which continues today.
Among the notable quotes from the speech, Barber discussed how Halma approaches short-term and long-term thinking:
“At Halma we chose the long-term view, aiming from the start to build slowly and carefully very much with an eye to the future.”
He also described the importance of an efficient, decentralized business model:
“Halma (is) like a centipede with very many little legs, but each leg moving a tiny step in the right direction. If every small move is positive and if every negative move is eliminated, then it is surprising how quickly one can move towards a defined objective. That is the long-term route.”
Like Roper, which operates out of a small corporate office in Sarasota, Florida, Halma has a modest corporate office nestled in between a church rectory, cemetery, and war memorial. It’s situated about 60 miles outside Central London in the idyllic market town of Amersham.
From a culture and systems perspective, this is precisely what you want to see from a serial acquirer that operates a decentralized business model. You don't want to see glitzy, over-staffed Central London offices with layers of staff micromanaging dozens of operating companies.
If you're going to ask your operating companies to run a tight ship, so must you.
We’ll talk more about Halma’s system in the moat section below, but first, let’s look at the portfolio of companies under its umbrella.
As of the last report, Halma owns and operates 45 small and medium-sized businesses in three dedicated sectors: safety, environmental & analysis, and healthcare. Its overarching mission is “to grow a safer, cleaner, healthier future for everyone, everyday.”
Each segment has a similar profit margin profile, evidence of a consistent approach applied across sectors.
While these are each attractive sectors from a secular growth standpoint, it's instructive to take a closer look at the individual companies to understand what types of businesses Halma wants to own. Here's one from each sector.
Safety
Halma acquired a specialized interlocking mechanism company, Fortress Safety, in 1987. It's a quintessential Halma-type acquisition – a niche, capital-light business that sells mission-critical services and products. It also benefits from a secular tailwind related to tighter safety regulations around the globe for manufacturing, transportation, mining, and other industrial end markets.
Environmental & Analysis
As we discussed in our profile of Core & Main, water infrastructure needs to be updated and requires continuous maintenance and growth investment. Earlier this year, Halma acquired SewerTronics, which uses robotic technology to rehabilitate wastewater pipes using UV light to cure a lining inside the pipe. The products reduce the need to dig up pipes to make repairs, which reduces cost and environmental impacts.
Healthcare
In 1996, Halma acquired Keeler, which makes ophthalmic equipment used by optometrists and ophthalmologists worldwide. Its BIO binocular product commands a 60% share of a competitive US market and is relied upon by practitioners to accurately and clearly view a patient’s eyes for evaluation and treatment.
Without seeing the financials of each company, there are observable patterns that suggest they have economic moats. Whether it’s mission-critical, highly-engineered products like those supplied by Fortress or patent-supported technology at SewerTronics, these are niche industries with limited addressable markets (less appealing to bigger fish) where pricing power is stable to strong.
That said, evaluating a serial acquirer's moat differs from an operating business, so let's look closer at Halma's competitive advantages.