The Motley Fool

The FTSE 100 is down today, but Halma investors aren’t panicking

Life-saving technology group Halma (FTSE: HLMA) announced today that it had made another couple of acquisitions, NovaBone and FireMate. These will sit beside the other five companies bought by the group in its 2019 financial year. If you look back to at least 2014, there’s not one year in which it failed to make an acquisition.

The group increases its revenues and profits through a combination of acquisitions, partnerships and organic growth. Buying other companies is a fundamental part of its strategy, which has helped its share price go pretty much straight up for the last five years.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

The shares’ longer-term performance is also encouraging. Shareholders enjoyed a total return of 1,141% from March 2009 to March 2019.

Fitting in

If the acquirer does its due diligence and doesn’t overpay for an acquisition that fits well with the company’s activities, then buying-in revenues and profits can add value for shareholders.

Of the two acquisitions announced today, one is a US-based designer and manufacturer of bone grafts, the other deals in cloud-based fire protection maintenance software for fire contractors.

Halma organises its businesses into four major segments: process, safety, infrastructure safety, environmental & analysis, and medical. The bone graft business fits nicely into the surgical applications subdivision of medical and the fire protection business slots into the fire subdivision of the infrastructure segment.

Looks like a bargain

NovaBone, the bone graft business, is being bought for approximately £74m in upfront cash, with up to £31m in add-ons depending on performance.

The group is paying about 14 to 20 times EBITDA for NovaBone (well below the 22.67 times average for the healthcare products industry). The price depends on performance and the new owner has forecast revenue and EBITDA of £16m and £5.3m respectively at its newly-acquired business. The price looks cheap to me.

Getting a 70% share of FireMate’s software business will cost Halma £6.2m upfront, with £3.3 in contingent payments. There’s an option to purchase the remaining shares exercisable in 2025.

Halma’s proportional share of FireMate’s last 12 months of EBIT would have been £0.35m and it’s paying 18 to 27 times EBIT for a controlling stake. Again, this multiple looks cheap compared to the 36 or 54 times EBIT averages paid for internet and system & application businesses.

The website Damodaran Online was used to find industry averages.

Not a bootstrapper

These are small acquisitions for Halma. Yet it’s encouraging to note that it doesn’t appear to be overpaying for businesses that fit well with existing operations.

Another issue with deal-hungry companies is that they sometimes buy growth to conceal weakness in their existing operations. According to Halma’s 2019 report, organic, constant currency growth ranged from 6.9% to 11.3% across its four divisions.

Organic, constant currency growth removes the distortions caused by acquisitions and exchange rate fluctuations. What it tells investors is that the group was growing well in 2019 before adding in acquired revenue. Since the pound weakened over the year, revenue growth on a non-constant-currency basis was even better.

At 2,161p, shares in Halma are not exactly cheap at 44 times consensus 2020 earnings of 49.6p. The forecast dividend yield is 0.8%, which is not awe-inspiring either. However, dividends and profits have grown by 7% and 13%, respectively, on average, over four years.

At the time of writing the FTSE 100 is down 2.4% but Halma’s share price has barely budged. For the long-term investor, the share looks like a good deal to me.

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to read our presentation.

James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has recommended Halma. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.