Tag: Halma

Annual Reports and Voting – HLMA, AUTO, PAY and TEP

It’s that time of year when many companies issue their annual reports and request that we vote on AGM resolutions. I pity our postman as I still receive most of the reports on paper (they are easier to read in that form) and they are getting to be very heavy. Here are some examples and brief comments:

Halma (HLMA): 248 pages.  Emphasises “sustainable growth over 50 years” and included a tribute to co-founder David Barber who died recently. Report is full of non-essential bumf which I doubt anyone reads. I voted against the Remuneration Report – total remuneration of CEO £3.5 million last year and against the Chair of the Remuneration Committee plus several other non-exec directors who either seemed superfluous or have too many jobs.

Auto Trader Group (AUTO): 170 pages. A clear description of the business and future developments but do we really need 20 pages of bumf on “Making a difference” (ESG etc). Interesting to note that the average price of a used car advertised on their web site rose by 22% last year. There is clearly a shortage of second-hand vehicles as new car sales have been depressed for a number of reasons. People are holding on to their cars for longer it seems. Again I voted against the Remuneration Report and the Chair of the Remuneration Committee (single figure of pay for the CEO last year was £1.7 million). Cannot see any reason for such generous pay for directors. Also as with Halma I voted against share buy-backs and calling General Meetings on 14 days notice.

Paypoint (PAY): 162 pages. This is a complex business providing payment and other services to retailers and SMEs. Their markets have been changing as mobile top-ups have declined and bill payments in cash also. Romanian business was disposed of and a settlement with Ofgem re competition infringements of £12.5 million has been booked as a prior-year adjustment. You can spend a long time reading this Report without getting a very clear understanding of where the profits came from and their future prospects.

Total pay of the CEO last year was £911k which is down on the previous year. Does that reflect the Ofgem settlement? I have no idea as the 11-page Remuneration Report does not explain. Again lots of ESG bumf under the heading “Responsible Business”.

Telecom Plus (TEP) also published their Final Results last week. This company is clearly going to benefit from the failure of numerous energy suppliers. The National Audit Office has blamed the Ofgem regulator for light touch regulation and allowing businesses to be set up with poor financial resources. Gareth Davies, head of the NAO, said: “Consumers have borne the brunt of supplier failures at a time when many households are already under significant financial strain having seen their bills go up to record levels. A supplier market must be developed that truly works for consumers”. Certainly regulation has been lax but the setting of price caps that stopped world market gas prices from being passed on to customers was also quite irrational.

With a lot of the competition to Telecom Plus being removed from the market their prospects are looking up and the share price has zoomed upwards.

Needless to point out that I hold shares in all the aforementioned companies. They have many things in common – high levels of repeat revenue, have high returns on capital and appear to be well managed. But they have not been immune to the general bearish view of the stock market by investors at present.

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

You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.

GB Group, Patisserie Holdings, FRC Stewardship Code and Halma

The stock market seems to be in limbo as business waits to see the outcome of Brexit politics. In my portfolio, small cap companies are drifting down and even large funds and trusts have been declining. Is this due to currency effects or the realisation that “star” fund managers such as Neil Woodford cannot be relied upon? Others are just bouncing around. However there was one exception yesterday when GB Group (GBG) jumped 14% after a positive trading statement. That company is one of my more successful longer-term holdings but there may be more growth to come from it because of the sector in which it operates. On-line id verification is becoming essential for many businesses.

The Administrator for Patisserie Holdings has issued their final report before the business moves into liquidation and another firm took over from KPMG to look into any legal recovery from the past auditors (Grant Thornton) and others. The handover was due to a conflict of interest. The Serious Fraud Office is still investigating the affairs of the company and a number of arrests have been made, but ordinary shareholders should not expect any return and it could be years before the legal processes are completed from past experience of similar situations. Even preferential creditors may not receive anything. The administration has so far cost £2.3 million.

The Financial Reporting Council (FRC) have announced a new Stewardship Code to improve the activities of institutional investors – see https://tinyurl.com/y5no8ot4 . There is more emphasis on “Purpose, values and culture” and the recognition of environmental, social and governance (ESG) factors.

This is all very worthy, but personally I would prefer the FRC concentrated on tightening up the quality of public company accounts for which it is responsible. It also needs to be a lot more forceful on patent audit failures that enable frauds to go undetected for years as at Patisserie – and there have been many other similar cases of not just downright fraud but also over-optimistic presentation of accounts.

This morning (25/10/2019) I attended a presentation by Halma Plc (HLMA) in the Investec offices. It was given by Charles King, Head of Investor Relations and it was a highly professional presentation unlike many we see. I have held shares in the company for four years and it confirmed that my choice of it as an investment was sound. But I did learn a bit more.

I’ll cover some of the key points that were made. This company has strong fundamental growth drivers. It has grown both organically and my acquisition over 45 years and now has 45 companies in the portfolio which primarily operate independently. One might call it a conglomerate. It focuses on life saving technology businesses – in essence “safer, cleaner, healthier”, in global niche markets. These are often regulated markets which helps on defensibility and growth. Demographic trends help as more people who are older and fatter promote growth and higher regulatory standards also move in. There is a lot of diversity in the products.

They aim for 15% growth per annum and have 6,000 staff in total. They bet strongly on “talent” to run the businesses. In essence there are many little companies all run by entrepreneurs who are left to operate as they wish. These people are paid on the basis of profit achieved in excess of the cost of capital but one requirement they look at when recruiting is that they must have “low egos”. There is only a small group of central staff handling some corporate functions.

Their focus is on acquiring companies with low capital intensity and ROTIC of greater than 16% when their cost of capital is about 8%. They are very diversified internationally but see opportunities to grow more in Asia/Pacific and other developing markets.

The high share price was questioned (or as one person put it: “it’s in nose bleed territory”). It’s currently on a forecast p/e of 32 according to Stockopedia which is higher than when I purchased shares in 2015 but the share price has more than doubled in that period. This company is like many high revenue/profit growth companies – they never look cheap but simply grow into their share price.

However the share price has fallen back of late like a lot of highly valued technology stocks that I hold. The speaker attributed this to market trends, not management share selling. Growth companies tend to go out of fashion as economic headwinds appear.

But if they stick to the business model, with the high return on capital and sensible acquisitions, I doubt they can go far wrong. In summary a useful and enlightening meeting for a company that until recently kept a low profile. But it is now in the FTSE-100 (market cap £7 billion).

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 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.

 

Exit mobile version
%%footer%%