Halma: safety first costs plenty

Britons like to make fun of overreaching health and safety instructions. But UK rules have made a significant difference to worker protection. No company could be happier than Halma, maker of safety equipment. The FTSE 100 group upped its guidance on Wednesday, stating that pre-tax profits for the year to March would be the same as the previous year’s £267m. Markets have already priced in a profits recovery and much more besides.

Britain’s Health and Safety Executive was quick to carry out inspections and issue fines to businesses that failed to be “Covid secure” during last year’s temporary lockdown easing. Expect the HSE to do the same as the country reopens this summer. That should be good news for Halma. Still, do not expect the share price to rise. Even after underperforming the wider FTSE 350 industrials index by 8 per cent since the start of the year, shares remain close to record highs. They trade on a pricey valuation of 40 times two-year forward earnings.

This optimism is linked to Halma’s specialities. Its medical division, which accounts for about a third of sales, is also its most profitable with hefty ebitda margins of 24 per cent. Sales fell when routine surgeries were cancelled last year. Their resumption will boost revenues. The recent £37m acquisition of Static Systems, which makes communication devices for nurses, should also bolster this division. Elsewhere, additional environmental regulation will support demand for the group’s detection equipment.

But the stock is expensive. ESG-focused investors like Halma. This explains its pricey valuation, a quarter above the five-year average.

Halma is also buying its way to further growth. About 73 per cent of its free cash flow went to acquisitions in the four years to March 2020. An estimated return on equity of 17 per cent coupled with a 50 per cent dividend payout suggests a sustainable growth rate below 10 per cent. That sounds low for its premium earnings multiple. For its all safety credentials, Halma is not a prudent bet.