UBS downgrades Halma on valuation grounds

UBS has downgraded Halma to 'sell' from 'neutral' with the health and safety technology group's shares tottering at 25-year highs and at a 49% premium to the engineering sector.

"If the world is better than expected Halma will likely underperform versus the group as it is less cyclical and if the economic outlook weakens we still see absolute downside risks," UBS said.

Acknowledging the FTSE 250 group's strong organic growth track record amid a declining sector, the Swiss bank noted that Halma has previously endured organic sales weakness in recessionary phases as its niche portfolio reduces its risks but does not completely remove them.

Consensus forecasts point to a 6% per annum ongoing sales growth, meaning that the risk of organic growth exceeding that "looks very limited" and acquisitions have generally fallen short of matching organic growth.

With deal sizes appearing on the rise, UBS stressed that striving for more
acquired growth increases the risks.

Analysts set a price target of 785p based on discounted cash flow, reasoning that even if management targets to grow at 15% per annum via organic and acquisitions are delivered, it would still only see 2020 expected EPS rise by 25% and Halma's EV/EBITA ratio in year-five back in line with its 20 year average.

"Looking at it another way, the share is pricing in stable margins and perpetuity growth of 3.5-4% per annum", which is 1.5-2 times the rate of perpetuity growth priced in for most of the other stocks covered by the same analysts.