Halma and Return on Capital

Yesterday I talked about Diploma (DPLM) and their calculation of adjusted return on capital. This morning Halma (HLMA) published their half year results and they also have a strong emphasis on return on capital, but in this case they call it “ROTIC” (Return On Total Invested Capital). This was down slightly at 13.4% and they define it as Adjusted Profit After Tax divided by Total Invested Capital. The latter is shareholders funds, plus retirement benefit obligations, less deferred tax assets, plus cumulative amortisation of acquired intangible assets plus historic adjustments to goodwill. This similar to the Diploma definition but it is not clear whether it is exactly the same and they call it something different.

As almost every company now reports “adjusted” figures of one kind or another, and analyst forecasts of earning are also usually based on adjusted profits, would it not make sense to have some standard for such data? That’s in addition to the current “statutory” figures which are mandated by the Financial Reporting Council (FRC).

Some of these adjustments, like the ones above in the case of Halma to calculate return on capital make a lot of sense if you wish to obtain a somewhat different view of a company’s performance. But some do not – for example I commented negatively only recently on the figures reported by National Grid.

The FRC would be the best body to set such standards, although they appear to have avoided doing so in the past. Now it just so happens I am attending a meeting with the FRC organised by ShareSoc/UKSA later today and if I get the opportunity I will raise this issue. It would certainly help investors if companies, financial analysts and information web sites reported such adjusted data in a consistent manner, would it not?

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Halma AGM and Sophos Capital Markets Day

On Thursday (20/7/2017), I attended the Annual General Meeting of Halma Plc (HLMA). Not exactly a household name so you may not know what they do. In summary, they have a “diversified portfolio of businesses” that are focussed on safety, health and environmental products. Lots of niche businesses in growth sectors and they define their segments as Medical, Infrastructure Safety, Environmental & Analysis, and Process Safety. Revenue last year was £961 million, with post tax profits of £129 million.

What attracted me to this business was the steady, consistent growth over many years and good return on capital (they give as 15.3% Group Return on Total Invested Capital) with good cash flow and moderate gearing. This has been achieved under CEO Andrew Williams who has been in the role since 2005 which must make him one of the longest serving CEOs in a FTSE company. In addition, the Finance Director, Kevin Thompson, has been in the role since 1997 although he is planning to retire in 2018.

Mr Williams gave a short presentation (interesting to note that the Chairman said little and the Annual Report only contains a statement from the CEO, not the Chairman, as would be more normal.

He said that Halma has a simple growth strategy. Focus on growing markets, e.g. healthcare, while looking to acquire businesses with technology or application knowledge. Wrapped around this is a simple financial model – they aim to double earnings every five years, without becoming highly geared or seeking further equity, provided there are similar rates of organic, acquisitive and dividend growth (to quote from the Annual Report – which is a very comprehensive document if somewhat weighty). Yes they do make acquisitions but these seem to be mainly smaller ones that are complementary and easily integrated.

As Mr Williams said, this strategy has “consistently delivered”.

Questions from shareholders were then invited.

I asked whether they hedged against currency fluctuations because I noted that the increase in profits last year (up 16.9% on an “adjusted” basis) included 10.5% that arose from exchange rate movements (Note: pound falling as a result of the Brexit vote when the company is a very international business – clearly it may be that the pound will move in the opposite direction sometime). The answer given by the FD was that they don’t hedge profits in the group structure. I also asked about the possible impact of Brexit. The CEO said as only 10% of company trading was to/from Europe they did not consider it likely to be a significant problem. No plans to counter had apparently been made.

In summary, on a prospective p/e of 25.3 and yield of 1.3% this company does not look particularly cheap but that’s true of most quality businesses in the current bull market. As most of their revenue and profits are from outside the UK, you might look at it as a hedge against Brexit damage but the company is certainly vulnerable to swings in the pound/dollar/Euro exchange rates.

There is a fuller report of this AGM available to ShareSoc Members.

Sophos

One thing I noted when I read the Annual Report of Halma was that the Chairman was also a director at software security company Sophos. They are holding a “Capital Markets Day” on September 6th, the day before their AGM. As I hold the shares, I asked investor relations if I could attend. They suggested it was really only for “analysts” and “institutional investors”. Now this is prejudicial to private investors and I reckon I have enough knowledge of the sector, and a large enough investment portfolio to justify attendance. But they fobbed me of with an offer of being able to attend on-line. Will that happen? We will see. For those who are not familiar with Capital Markets Days, these are much more in-depth reviews of a company than most investors see.

But in the meantime, I complained to Paul Walker who will take it up. I may go to the AGM also to complain.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

Disclaimer: Read the About page before relying on any information in this post.