The Investment Column: Halma pays for neglecting investors

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The Independent Online
Halma appeared to walk on water in the first 22 years after its chairman, David Barber, arrived at the engineering group in the early 1970s. The City was understandably mesmerised by a formula that has produced a probably unequalled record of 24 per cent a year compound earnings growth since 1973. But Halma appears to have succumbed to the hubris that eventually seems to afflict all such success stories. Yesterday the group announced its third profits disappointment in as many years, sending the shares slithering 27.5p to 162.5p, taking their underperformance against the rest of the market to 30 per cent over three years.

The immediate cause of the savage share price reaction was news of a 10 per cent increase in pre-tax profits to pounds 37.1m in the year to March, with earnings growth trailing along at 9 per cent. Respectable enough for most companies, that sort of rise is pedestrian in the context of a group which has traditionally been accorded a premium rating for double- digit growth.

The problems stemmed from two of the largest of Halma's 48 subsidiaries. Apollo, the world's third-largest maker of fire detectors, and Memco, the leading global maker of sensors for lift doors, together account for a fifth of group turnover. With exports accounting for over half their output, the strong pound hit profits hard.

More serious was the revelation that Memco's difficulties with a component supplier which emerged the previous year had not been sorted out. Coming on top of pricing pressures and a strike at large US customers, profits there were hammered. Overall the downturn at the two subsidiaries came to around pounds 2.5m last year.

But the real problem is that, like so many successful companies, Halma started to neglect its investors while things were going well and is reaping the City's wrath at the first signs of a stumble. The Barber philosophy remains intact. The acquisition of small companies which lead niche markets and are then made to sweat by highly financially motivated management will continue to deliver the goods. Last year, a pounds 21m outlay on acquisitions delivered pounds 3.28m of additional profits.

But the City will no longer take that on trust, even with the recent appointment of Lord McGowan, chairman of stockbrokers Panmure Gordon, as a non-executive director. Profit forecasts trimmed to around pounds 43m this year would put the shares on a forward p/e of 15. That could be a buying opportunity, with a one-for-three scrip issue in prospect to increase liquidity.

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