Halma looks ready to shift up a gear

ONE OF the most remarkable UK growth stocks, which I have often recommended in the past, is Halma, now at 184p. Given the past record there has never been a wrong time to buy the shares - they always grind remorselessly higher. But now could be a timely moment. The shares have marked time for more than two years and look ready to move ahead again.

Halma has sustained compound growth in earnings per share at a phenomenal average of 26 per cent since 1972. An investor who bought pounds 10,000 worth of shares in Halma at the low point in 1974 would now have shares worth an incredible pounds 7.6m and an annual dividend income of nearly pounds 90,000.

Despite its growth Halma is still a comparatively small company with sales and pre-tax profits of pounds 154m and pounds 29.2m respectively last year. This leaves it plenty of room to grow further; especially since more than 60 per cent of sales are into overseas markets. The group is actually a collection of businesses with 45 different subsidiaries covering many product areas, each with its own, autonomous management. Out of a total workforce of 2,500 around 180 are directors of subsidiaries.

The group is primarily a manufacturing operation with each of its companies a market leader in a profitable niche area. The biggest subsidiary, Apollo, makes fire detection equipment and has grown dramatically since it was acquired in the early 1980s after repaying its purchase price in just three years.

Acquisitions play a key supporting role in the group's growth with a regular flow of moderate-sized deals. These deals, which are almost invariably financed out of cash flow, either strengthen existing subsidiaries or take the group into new areas with the same niche-dominant high-return characteristics.

Latest interim figures showed a 15 per cent increase in pre-tax profits and, with many opportunities beckoning for the group, prospects look excellent.

Investors in search of a new Halma should look at another of my favourites, Serco at 493p. It has the same growth potential, though it is a very different company. Sales, profits and earnings per share have grown at a 20 per cent-plus compound rate for more than a decade with more to come.

A specialist in facilities management and systems engineering, Serco is a service rather than a manufacturing business but shares with Halma a strong management culture. At first sight the group seems to be a confusing hodgepodge of activities with responsibilities ranging from maintaining the park at Kensington Gardens to looking after Britain's four-minute warning system against nuclear attack. But chief executive Richard White argues that the group's specialisation is in outsourcing almost any activity. He describes this as introducing competitive disciplines to what otherwise - whether as a government department or an internal part of a company - would be a monopoly supplier.

As an example he cites the group's recent bid to manage the water and sewage facilities for Melbourne, Australia, a city of two million people. Serco had no previous experience of managing such installations and was up against civil engineering specialists. Nevertheless it won the largest of three contracts accounting for more than half the total. The group argues that it does not need specific technical expertise because the people come with the contract. It then spent three months persuading the unions to swap all their overtime arrangements for a higher salary. It has immediately become the most efficient service provider because its staff no longer have the incentive to work slowly in normal hours to boost overtime.

Serco's other great strength is its accumulated experience and reputation for handling hi-tech facilities. This comes from its original contract to run the base at RAF Fylingdales - a contract that has been retained for more than 30 years despite regular re-tendering. The group rarely loses contracts and is good at winning new ones. Over the past year it has won more than pounds 500m worth of work in the UK and pounds 150m in the Far East.

It is also becoming a one-stop shop on contracts, for example in traffic control, where it has the capability to design, install and maintain systems such as the variable speed control system on the M25. Mr White believes there are huge opportunities worldwide. The group is not growing even faster than the 21.6 per cent pre-tax profits increase achieved with the 1995 results because it targets a growth rate that it is confident of being able to service adequately.

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