Shares: An awesome commitment to investors

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The Independent Online
MOST quoted companies pay lip-service to the notion of maximising returns for shareholders.

It is an awesome experience when you find a company that really means it. Halma has been the nonpareil of UK quoted companies for the past 22 years. It has been run with a 100 per cent commitment to making its shareholders rich and has succeeded to a phenomenal extent.

A pounds 10,000 investment in the shares any time between 1974 and 1976 would now be worth more than pounds 3.7m. The yield may look low at 1.3 per cent, but that is for a dividend that has been increased by at least 20 per cent per annum for the past 17 years.

The company is celebrating its centenary this year. The recently published report and accounts is an extended version, justifiably trumpeting a remarkable achievement.

Growth has taken place almost entirely in the 22 years from 1972, when David Barber joined the group as managing director. At 62, he is still chairman and chief executive and has no plans to step down.

However, Halma is anything but a one-man band. Mr Barber has no direct managerial responsibility for any of the 50 subsidiary companies. There are about 120 directors throughout the group with autonomy in their areas.

Delegation and motivation are among the magic ingredients. Directors are rewarded with share options, which can add up to serious money, given the relentless appreciation of the share price.

Staff do not have share options, but over the past 12 years, trustees have started to buy shares in the open market to give to employees as bonuses.

The size of the bonus depends on pay and length of service. Even modest allocations soon build up into valuable nest-eggs. In 1994, more than pounds 300,000 will be reserved to buy shares for the staff bonus scheme.

Halma is also a good example of a company that is rewarding shareholders, including Mr Barber with more than 7 million shares, by growing slowly.

Most of the businesses are strong cash generators, and money is ploughed back fairly evenly into capital investment and a steady stream of small and medium-sized acquisitions.

Modest amounts of shares may be used in acquisitions, but the group has never had a rights issue. Acquired companies either bring in new free-standing businesses or add turnover cheaply to existing activities.

Either way, the only businesses that are bought are those able to live with the group's demanding criteria of profit margins averaging 18.5 per cent last year and a return on capital greater than 40 per cent for more than a decade.

What are these wonderful businesses? Halma is the ultimate niche player. It buys and builds businesses that are market leaders in specialised areas. The annual report lists 13 areas where Halma subsidiaries have market leadership in national markets. Seven subsidiaries - Palintest (water testing), Apollo (fire detectors), Castell Locks and Smith Flow Control (captive key-and-valve interlocks), Memco (electronic sensing for lift doors), ATM (microchip lead scanning and straightening) and Perma Pure (moisture removal from gas) are recognised as world leaders in their markets.

Growth and enhanced profit margins come from building sales on a global business. The result is that, although more than three-quarters of all products are manufactured in the UK, 55 per cent of sales are made overseas.

Another characteristic is that many of the products are aimed at markets driven by legislation designed to raise environmental or safety standards. This helped the company come through the recession with its growth record intact.

Sterling devaluation after September 1992 gave a further boost. The company is now seeing benefits, as the world economy enjoys an increasingly broad-based recovery.

Prospects look excellent for more of the same. Mr Barber says that the long record of success means there is no shortage of business in the pipeline.

There is also room for the subsidiary companies to improve their performance. Although 17 made record profits in 1993-94, historically that is not a high figure.

The only bad news is that at 227p the shares are highly rated on a historical price-earnings ratio of 26.6. If the company keeps growing at its historical compound rate of 26.2 per cent, that p/e will halve in three years.

A company showing signs of emulating at least some of Halma's attractive growth characteristics is former defence stock Fairey. Founded as a result of a buyout from Pearson in the late 1980s, the management team, led by Derek Kingsbury and John Poulter, moved rapidly to rationalise the defence interests and expand the group into niche electronics markets with strong growth potential.

These latter activities have grown dramatically over the past few years and now account for the lion's share of turnover and profits.

A common feature of many group products is that they enhance efficiency and quality control in manufacturing processes. One rapidly growing subsidiary, Red Lion Controls, is a leader in the expanding market for electronic counters.

The shares have been dramatically re-rated between 1991 and 1993, with the p/e rising from high single figures to over 20 at the current 380p. The group's older businesses in aerospace, defence, and filtration and ceramic equipment have good scope for recovery.

The higher-growth electronic businesses have increased their weighting in the group, which should also help boost the growth rate. Forecasters are looking for earnings per share to move ahead at a rate in the mid-teens, to drop the p/e towards 15 by 1995. My hunch is that those forecasts are pitched too low and that Fairey shareholders are in for pleasant surprises as the global capital goods cycle moves up a gear. The shares look attractive.

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