The Investment Column: Halma remains a risky bet

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The Independent Online
HALMA makes safety mechanisms for elevators and its investors have seen plenty of ups and downs in recent years. The share price has oscillated between a five-year high of 157.25p in 1997 and this year's low of 91.5p. The general trend has been downward, however.

It seems the market doesn't feel safe with the company - ironic, given it specialises in safety devices for a wide range of industries. While Halma's underlying businesses are solid, the City feels Halma is insufficiently transparent in its reporting. The market's caution is understandable. Halma's business is spread over 40 subsidiaries. These can be subdivided by geographical region, or by industry (water, gas, petrochemicals) or by activity (equipment to detect hazards or protection equipment).

Stephen O'Shea, the chief executive, says that both water and gas-related activities turned in a record result this last year. The petrochemical businesses overcame the industry downturn by pioneering new clients in, oddly, the communications market, he says.

But confusingly, the only sales breakdown in the group's results is according to "protection" and "detection". Such asymmetries deter analysts from following the company.

Despite the record performances, overall pre-tax profits fell 1 per cent as Halma's UK-based Keeler subsidiary, which makes opticians' instruments, lost a customer after delivering product six months late. Keeler's problems have since been addressed.

Halma is already the largest player in the safety business. Its margins are 19 per cent. The investment case for the group depends now on its ability to strike up alliances in new markets. Last year it spent pounds 15m making acquisitions, including a US locomotive breaks business and another elevator safety company. It acquired a partner in fire detection. These sound like piecemeal deals, but they enable Halma to leverage its existing product and marketing strengths.

Now Mr O'Shea is upping the pace. He plans a pounds 60m shopping spree this year. He is buying back the company's preference shares and is seeking authority to buy back ordinary shares in the market. Meanwhile, the company is introducing new products. Severn Trent has placed a pounds 2m order for Halma's new leaks detection system. Global sales should follow. Analysts expect pre-tax profits of pounds 44.1m and earnings of 8.4p per share this year.

The market's reaction to Halma's news is unpredictable. The shares closed up 14.5p at 113p yesterday on hopes of a share buyback, even though that's at the bottom of Halma's priorities. The shares were almost unmoved in April when Halma issued a trading statement. The group's fundamental strengths should not lead investors into seeing Halma as a safe play.