Appropriately for a company that is one of the world’s biggest suppliers of lift-door sensors, Halma’s numbers keep going up. Not only its dividends, which were raised by 7 per cent yesterday — the 31st year in a row of increases in the payout of more than 5 per cent — but also Halma’s sales and pre-tax profits, which have grown for the seventh year in succession. They are up 1 per cent to £459 million and 9 per cent to £86.2 million, respectively, in the 12 months to April 3.
If nothing else, that performance provided a useful reminder of the company’s resistance to recession. Spending on Halma’s products — everything from fire detectors, water treatment systems and gadgetry used for eye examinations — tends to be non-discretionary and driven by long-term structural trends (tighter health, safety and environmental legislation, urbanisation and demographics) rather than cyclical swings in GDP.
The detail in yesterday’s statement suggests that those trends are firmly in place. Halma’s overall order book has risen 14 per cent on the year, with orders in the second half of its financial year 9 per cent higher than the first — a pattern that the company says has persisted into its new financial year. Helped by a tight control of costs, operating margins are heading higher, too — up from 17.3 per cent to 18.8 per cent. The company is confident that, if sales grow by at least 5 per cent a year from here, it can keep operating margins in a range of 18 per cent to 22 per cent over the next five years, compared with 16 per cent to 20 per cent in the previous five.
Then there is Halma’s balance sheet. It has never carried big borrowings, but better-than-expected cash generation has turned last year’s £51 million of net debt into a £9 million cash surplus.
In fact, the only number of Halma’s not to have increased year-on-year is its spending on bolt-on acquisitions. It typically mops up two or three smaller companies each year but did only one deal over the past 12 months — the paltry £3.6 million purchase of SphereOptics, an American specialist in measuring sources of light. That dip explains why Halma reassured the market yesterday that a more stable economic environment had led it to intensify its search for takeover candidates.
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There is the odd indication of weakness. The division that supplies monitoring equipment to companies surveying oil and gas in the North Sea saw a fall in activity. Parts of Halma’s medical equipment business could be hurt by any tightening of government healthcare budgets. The flipside is that Halma is growing strongly in China, where it is supplying the country’s high-speed rail programme.
At 275½p, or 15 times earnings, the shares may look expensive — but the sort of consistent increases in profits that Halma delivers should command a premium. Hold.
Devro
Whether England win, lose or draw in Port Elizabeth today, Devro, the maker of collagen casings for sausages, should emerge as one of the London stock market’s more unlikely gainers from the month-long tournament.
Alongside last month’s trading update, the Glasgow-based company disclosed it had secured a sizeable “one-off” order from an unnamed food producer in South Africa before the World Cup — thought to have been triggered by demand for hot dogs from the influx of fans. Although the additional sales are not big enough to alter Devro’s numbers, they are welcome, all the same.
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But if Devro’s shares have more than doubled on the year, that has more to do with the across-the-board improvement in its fortunes. Worldwide sales of edible food casings are growing at about 4 per cent a year but collagen continues to grow faster than traditional gut-based alternatives — because of its more consistent quality, the changing preferences of consumers as they become wealthier in industrialised countries and enhanced regulation on food safety and traceability. Pricing has become more stable after a period in which mergers between food producers enabled them to exert greater pressure on suppliers. And the shortage of animal hides caused by the credit crunch has eased: collagen is recovered through the tanning process, but reduced demand for leather upholstery from carmakers made it difficult to source.
Last month’s increase in Devro’s profit forecasts and the first rise in its dividend in four years is testament to that turnaround. But at 190p, or 13 times 2010 earnings, the continuing productivity gains suggest that they have farther to run. Buy on weakness.
Norcros
If shares in Norcros remain stuck near their record low, that should not surprise. The small-cap owner of Triton Showers and Johnson Tiles has cancelled its dividend, racked up its second consecutive year of annual pre-tax losses and draws the majority of its sales from Britain — where spending on housing refurbishment, the biggest determinant of revenues, is expected to remain weak. If that were not enough, Norcros’s principal continental European presence is in Greece — a 50 per cent stake in a tile-making and adhesives venture whose value the company confirmed yesterday it has written down to zero.
But Norcros’s numbers are not without merit. Through last year’s £27.7 million share placing, the company has drastically cut its debt — net borrowings at March 31 had fallen to £15.9 million and will fall further, given this month’s £4.3 million disposal in Australia. More impressive, both Triton and Johnson, market leaders in their space, reported strong year-on-year sales growth in Britain — up 12 per cent and 6.6 per cent, respectively.
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In tiles, Johnson has been helped by restocking at Homebase and has extended its reach in supplying other DIY retailers, especially B&Q. Johnson could also benefit from last week’s collapse into administration of Pilkington’s Tiles, the B&Q supplier that is one of its biggest rivals. Overseas, Norcros’s South African business — which accounts for 30 per cent of sales — is showing tentative signs of improvement.
A stock market value of £45 million means the shares are overlooked by most professional investors.
The move of Norcros’s pension scheme from surplus into deficit is obviously a concern. But a forecast shift back into profit in the current financial year, a potential return to the dividend list and yesterday’s board-level buying could trigger fresh interest.
At 7¾p, or 14 times earnings, this is a buy for the brave.