Investment Column: Investors can have confidence in Halma

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The Independent Online


Our view: Buy

Share price: 275.5p (+4.5p)

Halma, which specialises in hazard detection and "life protection" technology, looks in rude health itself these days, although it did have to undergo some painful cuts to get here.

Its products include smoke detectors and safety sensors for lifts and automatic doors, water disinfection systems and ophthalmoscopes. Other pieces of Halma kit are used in photonics and gas detection, and for locating leaks in water pipes.

Halma released its results for the 53 weeks to 3 April yesterday. Revenues were up 1 per cent at £459.1m, while pre-tax profits rose by 9 per cent to £86.2m, beating analysts' expectations. That revenue growth came in the second half of Halma's financial year after management aggressively cuts costs during the first six months – although it pointed out that research and development spending had been ring-fenced.

The company is giving the feeling that its operations are in shape for the expected recovery and the board has pledged to boost revenues and profits by 5 per cent per year, backed by more investment in the business.

Halma has also been concentrating on expanding in China. Revenues from that region were up 59 per cent, and now make up 4 per cent of the group's total income. Halma, headquartered in Amersham, Buckinghamshire, has also been rewarded with a Chinese contract to provide door sensors on a high-speed rail project in which 16,000 miles of track are to be laid.

Loyal investors have been well rewarded over the past year with a share price increase of more than 55 per cent. In addition, they enjoyed a 7 per cent rise in the dividend to 8.5p yesterday. We believe there are grounds for thinking that management's promises on growth will be met this year and that the divi is secure. Investec has the share price of 13.7 times this year's forceast earnings, which is only slightly higher than the UK electronics sector's 12.7 times.

The premium is deserved, and we are now buyers.


Our view: Sell

Share price: 3111p (-199p)

Defence is hardly ever out of the news. The conflict in Afghanistan continues, so companies selling to the likes of the Ministry of Defence could be thinking the next few years might not be as bad as feared. That was the picture painted at the half-year by Chemring – a maker of pyrotechnics, bomb disposal equipment, flares and munitions – when it reported that its order book was up a healthy 16 per cent at £651m.

There is a fly in the ointment, however. The Government is set to unveil the findings of a defence review later this year which will almost inevitably lead to spending cuts. That in turn is bad news for companies like Chemring, which will see a fall in demand from the UK and other cash-strapped nations. In the past year, investors have had a good run with Chemring, with its shares rising nearly 70 per cent. Now is the time to book those gains.

Not only is the defence sector set for cuts (Chemring says it will avoid the worst by generating greater revenues from emerging markets) but the stock, which trades on 11.5 times 2011 forecast earnings, is already at a premium to its sector.

The dividend went up by 21 per cent yesterday but, according to Investec, will offer only a lukewarm yield of 1.8 per cent this year. Britiain's defence cuts will only hit the industry in 2011 or 2012, but we are already nervous about the sector, so sell.


Our view: Hold

Share price: 4.62p (+0.88p)

The last time we looked at Infoserve, we recommended a speculative punt. The company, which compiles online business directories, had a torrid year and we thought braver investors might find it interesting, given the opportunities presented by a growing market for online advertising.

Unfortunately, the shares have cointuned to fall (although its important to remember that volumes have been low because this is not a heavily-traded stock) and it implemented a shares consolidation exercise earlier this year.

The most recent declines appear to have coincided in part with the announcement of a joint venture with Iliffe News and Media, which has interests in newspaper publishing and television. The venture, which is 50 per cent owned by Infoserve, will offer small businesses the chance to buy packages that combine print and online advertising. But the deal will weigh on Infoserve's earnings for the year to March 2011 – so much so that, in light of the start-up costs, earnings will be lower than previous forecsts.

While the deal should begin paying off in 2012, for now, with market sentiment so weak, we would be cautious about continuing to buy. Infoserve did post its first pre-tax profit yesterday, indicating promise and fuelling confidence in the company. The results also sparked intra-day gains in the shares. Given how far its fallen, there is no point selling, so hold for a recovery.