Halma

From tea plantation to niche king

What stocks do most investors my age invest in? Surveys have shown that names like Tesla, Amazon, Apple, Microsoft and Facebook are at the top of the shopping list. Actually, I have nothing against that; it's generally a smart idea to invest in companies you know and understand. For my part, though, I'm a big fan of so-called "boring stocks" - stocks that very few investors have on their radar, but whose businesses are developing really excellently.

The British company Halma plc is exactly that kind of stock. The conglomerate comprises over 40 individual companies, all focused on making the world a bit cleaner, safer and healthier. From a financial point of view, too, Halma cuts an exceptionally good figure. So I'm very grateful to my blog reader Thomas, since he pointed me to the company on my Bunzl article.

The history and business model of Halma Public Limited Company

The origins of today's niche holding company go way back to the 1890s, when a tea producer was founded in Sri Lanka. But one thing at a time. Tea originated in China, where it was used as a remedy more than 5,000 years ago. Tea only came to Europe in 1610 - to be precise, sailors brought it to Amsterdam. Demand was stable and the Dutch remained the only tea importers for the time being. Gradually, the English in particular came to love tea. Without further ado, the British Empire founded the East India Company and secured the monopoly on tea imports. To earn more money, higher taxes on tea were levied in its colonies in the 1760s, which led to protests and ultimately to the Boston Tea Party, which arguably kicked off the American War of Independence.

From the 19th century onward, tea was mainly grown in India. In addition, the British colonized the island of Sri Lanka in 1815, named it Ceylon and began growing coffee there. The island's soil and temperatures were excellently suited for cultivation, but a pest epidemic in 1868 destroyed this business. The British Empire had little success with cocoa and tea either. Things looked different, however, for James Taylor, a Scottish tea planter who, just a few years later, successfully set up the first fully equipped tea plantation in Sri Lanka. Side note: Taylor later worked closely with the merchant Thomas Lipton (today Unilever).

In early April 1894, the Nahalma Tea Estate Company Limited was founded in the Kegalle district, which, as the name suggests, mainly produced tea. Business was stable and managed to keep its head above water over the next decades. Besides tea, the company increasingly focused on rubber production, since demand for rubber was growing, especially in the USA and Europe. For this reason, operations were switched entirely to rubber in 1937, and for that purpose the name was also changed to The Nahalma Rubber Estate Company Limited. In 1950 the Sri Lankan government nationalized all rubber plantations, thereby eliminating the business. Out of necessity, so to speak, the company had to restructure once again and became an investment and holding company named Halma Investments Limited.

In fact, the business drifted along for a few years before businessman David Barber took control of the investment company in 1972. At that point it had a market capitalization of less than 1 million pounds. Barber began buying up a series of companies from the fields of mechanical engineering, electrical engineering and electronics, laying the foundation for the holding's later success. Business developed really excellently; organic growth as well as growth through further sensible acquisitions was remarkable. In 1981 the company was converted into a public limited company and Halma plc was listed on the London Stock Exchange. Today it focuses on niche companies, with the goal of making the world safer, healthier and cleaner. This includes sectors such as fire detection, water analysis, food safety and medical technology, but also safety solutions for elevators, gas monitoring, access control systems and many more.

How can Halma plc develop over the next few years?

First, I'd like to briefly sum up the investment holding's business model once more. Halma clearly prefers niche markets with a global focus and long-term growth potential. It currently unites 42 companies under one roof, with all companies operating independently. Basically, it divides its subsidiaries into three main sectors.

1. Safety: product solutions for fire suppression/detection, elevator safety, automatic door systems, pressure management, safe storage and access control systems;
2. Environmental & Analysis: environmental monitoring, gas detection systems, analysis solutions as well as water treatment systems;
3. Medical: life sciences, health analysis solutions as well as therapeutic solutions;

Now let's take a look at the figures from the most recently published report (Annual Report 2021 - ended March 31, 2021). Compared with the previous year 2020, total revenue did decline by 2 percent to now 1.3 billion GBP, but thanks to lower expenses it was able to increase its adjusted profit before tax by 4 percent. This now stands at 278.3 million GBP - a new record profit. Earnings per share also rose from 57.39 pence to now 58.67 pence. Figures that are really impressive.

Without a doubt, Halma will continue to grow in the future through acquisitions as well as through its existing network of companies. It has a clear set of rules for its acquisitions, which it will stick to with discipline. It also continuously invests in its own business and its employees - that's the only way to make sure it holds a strong position in the global market in the future too. All in all, I'm very confident about the next few years for Halma plc.

What about the dividend?

In an old archive text from 1897, I found out that the then Nahalma Tea Estate Company already gave its shareholders a share of the company's profits in 1894. To what extent this dividend was maintained over the following decades, however, I couldn't find out. Since 1979 at the latest, Halma has pursued an investor-friendly payout policy - since then the dividend has been raised by at least 5 percent every year. The average dividend growth rate over the last 10 years is 7.5 percent. The current dividend yield is only 0.6 percent - but the payout ratio of 33.3 percent signals plenty of potential for future increases.

Conclusion:
It was undoubtedly a long road from tea planter to global niche group. Today Halma plc is broadly positioned and shines with excellent revenue and earnings growth. I'm confident that the company can continue to develop well in the future and therefore recommend that long-term investors add Halma to their watchlist.