BUY: Halma (HLMA)
The equipment maker’s stellar record is still intact, writes Jemma Slingo.
The market was not impressed by Halma’s full-year financial report. Shares in the specialist equipment maker fell by 5 per cent shortly after it was published, undoing some of the promising gains made since January.
There are a couple of possible explanations. Statutory profit before tax was down 4 per cent, which management attributed to a £34mn gain on disposal that was banked the previous year. Excluding this one-off gain, profit before tax increased by 7.8 per cent, while adjusted profit before tax was up by 14 per cent at £361mn, slightly above consensus expectations.
More concerning was Halma’s cash conversion figure of 78 per cent, which was significantly lower than the 90 per cent targeted. Management blamed this on higher inventory as a result of supply chain issues.
“There was a difference in cash conversion between the first and second half, which was due to some of the supply chain pressure easing in the second half and allowing conversion to return to our 90 per cent target,” said chief financial officer Steve Gunning.
Other metrics also improved as the year progressed. Organic constant currency revenue rose by 9.5 per cent in the first half and 10.9 per cent in the second. Similarly, adjusted profit increased by 10.9 per cent in the first half and by 17.5 per cent in the second half. Given that Halma’s order book is also strong — it is ahead of the comparable period last year — its growth prospects look good.
Halma’s stellar record is also reassuring. The group has now delivered 20 years of consecutive adjusted profit growth and 44 years of consecutive dividend growth of 5 per cent or more.
Management seems determined not to let things slip: R&D expenditure increased by £17mn to a record £103mn in the period, while it spent a record £397mn on acquisitions. These investments have significantly increased Halma’s debt burden, however, and the group’s gearing ratio (ie net debt to Ebitda) now sits at 1.38 times, compared with 0.74 last year.
Moreover, Halma is entering new territory. After 18 years in post, Andrew Williams has now retired as chief executive, leaving the company in the hands of Marc Ronchetti. The economic backdrop means it is a difficult time to take the reins, and Halma is more than three times bigger than it was during the 2008 financial crash.
However, we remain convinced that Halma is a quality company with a proven business model and strong product portfolio. It doesn’t come cheap, but its price/earnings ratio of 29.5 is significantly lower than its five-year average.
SELL: Berkeley Group (BKG)
The housebuilder has not shied away from bad news, but that does not make it much easier to swallow, writes Mitchell Labiak.
On the morning of Berkeley Group’s results release there was a lot of other news to take on board. Core UK inflation hit a fresh 30-year high; the two-year gilt yield reached 5.1 per cent, the highest level since 2008; national debt hit 100 per cent of GDP for the first time in over six decades; and annual house price growth slowed to a pace not seen since September 2020, when Covid-19 restrictions dragged on the market.
Berkeley was among the worst performers in the FTSE 100 alongside fellow housebuilders and real-estate investment trusts, whose shares fell by 2 per cent to 4 per cent. The prospect of higher interest rates is weighing on the sector, and the news from Berkeley’s own results was mixed at best.
Starting with the good news: the increase in pre-tax profits beat consensus forecasts while revenue and operating profit also ticked up. Like most housebuilders, Berkeley is sitting on net cash, though its £405mn is particularly comfy and much more than last year when it had £263mn in its coffers. This is prudent when interest rates are likely to remain high over the coming months.
Higher rates mean the housing market fall could drag on for longer than first predicted. Berkeley said there was a “lack of urgency” in the market and forecast that sales would drop by a fifth over the reporting year. Combined with rising construction costs, this could further reduce its operating margin, which fell 103 basis points to 20.3 per cent.
Dividends returned this year, though they remain 21.8 per cent below 2021 and 23.8 per cent below 2019. The issue is not earnings, as the dividends are well covered. Modest distributions are likely to be an indication of low confidence in the coming months, which is to be expected in this market but not great news for income seekers.
Given this, it is hard to justify the company’s 20 per cent premium to net asset value, especially with many peers now trading on discounts — notwithstanding Berkeley’s focus on wealthier buyers. On a price/earnings ratio, the shares look better value, though the predicted drop in earnings makes them less so. Therefore, at this price, we downgrade our rating.
HOLD: IG Design (IGR)
The company is targeting 2025 as a key year for profitability recuperation, writes Christopher Akers.
Gifting and stationery company IG Design’s operating profit margin and share price were hit by supply chain headwinds as costs increased materially in its key US market.
But the share price has doubled over the past 12 months, with the market taking interest in a potential recovery story — although April’s trading update, detailing a goodwill writedown, took some of the shine off. In this context, management’s reaffirmation that it is aiming for margins to hit pre-pandemic levels again by the end of the 2025 financial year was an important one.
There are signs that the recovery strategy is bearing fruit, judging by a better than expected rise in underlying profits and operating margin. However, an adjusted margin of 1.8 per cent is not exactly world-beating.
A big part of the story is the ongoing restructuring of the business in the US, which contributes two-thirds of sales. A US sales fall of 10 per cent was driven by the exiting of unprofitable contracts and weaker volumes in the second half. International sales fell by 3 per cent, with adverse FX movements offsetting growth — European growth of 18 per cent was a standout.
The pivot to a statutory loss was affected by the $29.1mn (£22.7mn) impairment of historic goodwill from UK and Asia acquisitions as the cash flow outflow weakened. Management pointed to ailing consumer demand in the UK in the final quarter.
A stronger balance sheet supports the recovery narrative. The company has refinanced a $125mn banking facility, while net debt (including leases) fell by $40mn, year on year.
Elsewhere, the order book came in at a solid enough 62 per cent of budgeted 2024 sales, although this was lower than the 71 per cent last year.
Canaccord Genuity raised its adjusted pre-tax profit forecasts for the next two financial years by 8 per cent and 11 per cent, respectively. Analyst Mark Photiades said that the broker expects revenue growth to resume in 2025.
The shares are rated at 12 times forward earnings, according to the analyst consensus on FactSet. This looks like good value if the margin recovery plan works out, but that remains to be seen.
