Halma: a compounder of niches- Essential technologies delivering value to customers |
When you’ve owned a company in your fund for more than seven years, two things are usually true: it has consistently proved its worth, and you’ve had the chance to watch that business not just grow but compound.
Our portfolio isn’t built around big, flashy, binary outcomes. We hunt for ‘quality growth’ businesses, which are the kind that deliver steady increases in sales and profit, quietly, year after year, and sometimes so effectively that they sneak up the roster faster than you’d expect. UK industrial conglomerate Halma, which we have owned since late 2018, is a plum example. Starting at roughly 0.9% of our portfolio, its share price has almost trebled since, helping to push it to the 5% limit for a single stock in our portfolio. Because of this, we have recently trimmed the holding back to keep risk where we want it and will continue to do so when required. This wasn’t a change of view, it’s a part of our risk discipline, and a sign that one of our best ideas has done exactly what we hoped it would. Trimming because a stock has performed well is one of the nicest problems we face as fund managers. It means that our investment is working, the business is doing what we expected, and that risk is being actively managed, not silently accumulating.
So why is Halma one of our fund’s long term anchors, and why do I think it still has more growth in its future?
Halma’s family of niches
Halma employs more than 8,000 people across roughly 55 companies, all united by a clear purpose: making the world safer, cleaner and healthier.
That’s not marketing fluff. About three-quarters of Halma’s businesses operate in regulated or semi regulated markets. These are areas where safety, environmental standards or healthcare imperatives dissuade chopping and changing suppliers. Halma operates in market niches where customers care deeply about reliability, accuracy and performance. It offers genuinely mission critical products, often at relatively low ticket prices, but delivering high value to their customers. Contrast this with sprawling, commodity-like categories where it’s difficult to defend profit margins from competitors.
Halma organises its companies into three divisions.
Safety is the most stable, consistent growth engine in the group and includes companies that make fire detection and suppression systems, sensors for lifts and public spaces, and safety gear for factory workers and infrastructure. These products are everywhere, often unnoticed, but absolutely essential. Growth here is supported by rising safety regulations and global urbanisation.
The environmental and analysis division develops high-end photonics and spectroscopy gear used to monitor air and water quality, and in biopharma diagnostics. There are also companies that support food testing, monitor the integrity of dams and offshore windfarms, detect gases and enable data flows. This division has the highest profit margins, thanks to highly technical products and deep customer relationships.
Then there are the companies supplying components, devices and systems used in eye health, dentistry, orthopaedics, women’s health, diagnostics and more. Halma’s companies focus on helping its business customers improve standards of care through better patient analytics, more efficient clinical workflows (think lab AI automation), and by supporting the search for new treatments.
Business hunters
This niche focus drives Halma’s standout financial hallmark: organic revenue growth of around 6-7% over a decade, with EBIT (earnings before interest and tax) margins of roughly 20%. That kind of consistency is rare.
Every year, Halma quietly does what we like our companies to do: execute well, reinvest sensibly in itself and deliver steady growth. Halma’s decentralised model is well-oiled. Each operating company (OpCo) runs its own show – pricing, research and development, customer strategy – while the group provides capital, expertise and a long term cultural compass. This encourages healthy competition among OpCo executives for performance as well as collegial sharing of best practices and good ideas from fellow OpCo leaders in other industries. The OpCo model also encourages accountability and buy-in. Teams push each other to improve and are accountable for their own success.
We think this strong and flexible management puts Halma in good stead to mitigate risks. Halma has been seen as a ‘bond proxy’ because of its steady, compounding growth profile. This means it can be susceptible to share price falls when bond yields rise. The correlation between Halma’s share price and 10 year yields has been strong historically. More recently, Halma has gained ‘AI beneficiary’ status thanks to its photonics division, supplying products to a large hyperscaler (possibly Meta). Being exposed to this theme has not only driven earnings upgrades but also very strong share price momentum in recent months.
Higher borrowing costs can also make it tougher for Halma to make acquisitions. If bond yields refuse to drop, it will make such purchases more difficult. However, as we will see, Halma is laser-focused on the cost of capital, which means it’s likely to pass on acquisitions if financing costs are too high.
Long-term incentives matter
About 90% of short-term management bonuses are tied to economic value added (EVA), not year-by-year fluctuations in earnings. In other words, company managers make money only if profits are higher than the cost of the debt and equity that’s invested in them. Simply making more revenue than costs isn’t enough. Long term share-based incentive plans are based on three-year EPS growth and returns on total invested capital, again reinforcing the focus on clearing the cost of investment.
Halma has a pipeline of 600-700 businesses that they are reviewing for purchase. But they only buy when the cultural and strategic fit is right. And when the price is good. It’s looking for niche leaders, not businesses being auctioned to the highest bidder. The company aims to double its size every five years.
This framework has created one of the UK’s most reliable compounders that we’re happy to hold for a long time yet.
The views expressed are those of the fund managers, and coverage of any assets held must be taken in the context of the constitution of the fund and in no way reflect an investment recommendation.
The value of investments can fall, and you may not get back the amount invested.
