Morning Note: Market news and an update on Halma.

Market News

US Core CPI for May came in below market expectations – 0.16% month-on-month vs. 0.28% forecast – pushing hopes of an earlier interest rate cut. However, the Federal Reserve left rates unchanged at 5.25-5.50%, with officials pencilling in just one rate cut this year. They now see four reductions instead of three in 2025. They acknowledged “modest further progress” on prices. Jerome Powell indicated policy makers need more good data to be able to cut. Swap contracts still broadly point to rate reductions in November and December. The 10-year Treasury currently yields 4.30%, while gold has since slipped back to $2,317 an ounce.

US equity markets continued their upward march last night – S&P 500 (+0.9%), Nasdaq (+1.5%). Broadcom rose by 15% after hours as results and its annual forecast topped estimates, lifted by robust demand for AI products. This morning in Asia, markets were mixed: Nikkei 225 (-0.4%); Hang Seng (+0.9%); Shanghai Composite (-0.3%).

The FTSE 100 is currently trading 0.2% lower at 8,200. Following the completion of its right issues – where the take-up was 91% – National Grid has secured subscribers in a rump placing deal, with c. 97.7m shares placed at 835p. Companies trading ex-dividend this morning include Compass Group (0.74%), Land Securities (1.93%), RS Group (1.93%), and Scottish Mortgage Investment Trust (0.3%).

The UK housing market is cooling as hopes of an imminent rate cut fade. RICS says a gauge of new buyer demand dropped to a six-month low of -17 in May versus -6 expected. Sterling trades at $1.2770 and €1.1824.

OPEC+ probably won’t need to raise oil output later this year without a ramp-up in world demand, according to Energy Aspects, which expects China consumption to pick up at year-end. Brent Crude held steady at $82.25 a barrel. In the defence sector, German lawmakers approved the purchase of two more combat ships, adding to the previous purchase of four navy frigates. Beijing urges the EU to reconsider tariffs on Chinese electric vehicles.

Source: Bloomberg

Company News

Halma has today released results for the financial year to 31 March 2024. Profit was ahead of market expectations and the group raised its dividend by 7%. In response, the shares have been marked up by 7% in early trading.

Halma is a global group of life-saving technology companies, with a focus on safety, health, and the environment. The group’s technology is used to save lives, prevent injuries, and protect people and assets across a broad range of sectors including commercial and public buildings, utilities, healthcare/medical, science/environment, process industries, and energy/resources. The main growth drivers include increasing health and safety regulation, demand for healthcare from an ageing population, and demand for life-critical resources. Strong market positions deliver upgrade and replacement sales opportunities as customers seek to maintain regulatory compliance and conform with best practice. As a result, customer spending is often non-discretionary and drives sustained demand throughout the economic cycle.

Over the last year, against a backdrop of varied market conditions, the company delivered record revenue and profit, with continued high returns. In addition, the group continued to make substantial strategic investments to enhance future growth opportunities.

During the year, revenue grew by 9.8% to £2,034m, helped by a 4.7% contribution from M&A, offset by a 2.8% currency headwind. The organic increase was 7.9%, with price increases of 3%, modestly above the upper end of the group’s typical historical range of 1%-2%, offsetting cost inflation. These increases were supported by continued product investment to ensure they continue to address customers’ needs.

Performance by sector was varied given mixed market conditions. The Environmental & Analysis Sector delivered very strong revenue growth (up 20.8% in organic terms), driven by exceptional growth in the photonics business, and also well supported by Water Treatment and Analysis. However, spectroscopy was weaker. Revenue growth in the Safety Sector (+6.2%) was broadly spread, supported by a healthy order book. In Healthcare, revenue declined by 2.6% given the impact of OEM destocking and budgetary constraints in the Healthcare Assessment & Analytics and Life Sciences subsectors, partly offset by strong growth in Therapeutic Solutions.

By region, the US and Mainland Europe, the group's two largest regions which together account for two-thirds of revenue, grew strongly. Growth in the UK was solid, while Asia Pacific’s revenue declined mainly due to weakness in China. Revenue growth in the other smaller regions was strong in aggregate.

The adjusted operating margin rose by 40 basis points to 20.8%, towards the upper end of the group’s target range of 18%-22%. Adjusted profit before tax grew by 9.7% to £396.4m, above the consensus expectation of £388.5m. Although the group’s return on total invested capital slipped from 14.8% to 14.4%, it remains well above its estimated weighted average cost of capital of 9.7%. Halma has a fantastic dividend track record, having increased the payout by 5% or more every year for the last 45 years. Today, the group has declared a payout of 21.61p, 7% higher than last year.

Cash conversion was strong at 103% and above the group’s target of 90%. Net debt has moved from rose from £597m to £653m, with financial gearing of only 1.35x net debt to EBITDA, well within the target of ‘up to 2x’. This enables continued investment, both organically and by acquisition, to support continued growth. R&D investment rose to £107.2m, representing 5.3% of revenue. The group has made eight acquisitions in the year to date, for a maximum total consideration of £292m, and has a promising pipeline.

Looking forward, the group has made a positive start to the new financial year. Order intake in the year to date is ahead of both revenue and the comparable period last year. The company expects to deliver good organic constant currency revenue growth in the year ahead and an adjusted margin of around 21%, in the middle of its target range.

Source: Bloomberg