Berenberg initiates coverage on Halma with a 'buy'

The German broker said that with its high market shares in niche segments of industries, combined with its strong diversification by geography and end-market, Halma had displayed "impressive organic growth", and felt the company still held the potential to grow significantly in both developed and emerging economies, as well as into adjacent and new market verticals, over the coming years.

On the flip-side, Halma, which operates in typically slow-moving industries, could be disrupted by the current trend towards automation and data exchange in manufacturing technologies, the so-called "fourth industrial revolution", it said.

Also according to the broker, the winners in this particular race would be the companies that were well-aligned with connectivity trends, were partnered with technology firms, had capacity to invest, and had scale within a nimble operational structure.

"As we believe that Halma exhibits all of these characteristics, we think it is as well-positioned as any to succeed and take market share over the medium-term," the analysts said.

Given the increasing size of the business, Berenberg also noted that to sustain its impressive 13% EPS CAGR, Halma will need to execute larger and more frequent deals in order to maintain its premium market rating.

Yet after having assessed the company's track record, financial capacity and scale of M&A opportunities, it believed this was "comfortably achievable" over the medium-term.

"In our view, having delivered a 13% EPS CAGR since 2005 and 38 years of unbroken dividend growth.

"Quality does come at a price (24.7x 2019E P/E, 17.7x EV/EBITDA), but we expect this growth trajectory to be sustained over the medium term and believe the recent pullback in the shares (-6.5% YTD) provides an attractive entry point for investors. We initiate coverage with a Buy rating and a GBp1410 price target."