This FTSE 100 share should be a core holding for investors

The appeal of “quality compounder” Halma (LSE:HLMA) to long-term investors was highlighted by a City bank today after it said the safety technology firm deserved a premium rating.

UBS’ upgrade to a “Buy” recommendation and increase in its price target from 2,200p to 2,700p helped Halma near the top of the FTSE 100 index following a rise of 210p to 2,287p.

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The shares have been stuck in a tight range since November 2022 as higher interest rates have weighed on such acquisitive compounders.

Expansion in the Halma valuation multiple is likely to depend on lower interest rates, but for now UBS said the drivers of low-double digit earnings growth remained in place.

It said: “For the long-term quality focused investor we believe Halma should be a core holding.”

The bank said its sweetened stance reflected greater conviction in Halma’s ability to deliver through-cycle defensive growth ahead of target.

It expressed its appreciation for the quality of earnings, with an “enviable” 10-year track record of 21% operating margin and strong cash generation able to support continued acquisitions in line with the compounding growth model.

Over the last 20 years, Halma’s pre-tax profit has increased by over six times at a 10% compound annual growth rate. Its 2022-23 payment of 20.20p was Halma’s 44th consecutive year of dividend per share growth of 5% or more.

The record has been built despite economic and geopolitical upheaval such as the global financial crisis, Brexit, and, more recently, the pandemic and the war in Ukraine. For most of that period Halma was led by Andrew Williams, who stepped down as chief executive last March.

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Finance boss Marc Ronchetti, who replaced Williams to become Halma’s fourth chief executive in 50 years, delivered a trademark in-line update earlier this month when he reported “strong growth in varied market conditions”.

Eight acquisitions have been completed in the financial year at a cost of £299 million, including a maker of ballasts and sensors for ultraviolet sterilisation. In the three sectors of Safety, Environment & Analysis and Healthcare the conglomerate continues to report a healthy pipeline of acquisitions.

Future additions will be chosen on the basis of the Halma model of not overpaying or doing restructurings and buying higher margin businesses with growth opportunities. It is careful to choose businesses who are niche specialists and who know their customers and their markets.

UBS said the beauty of the Halma portfolio was its breadth but that photonics and water in Environmental & Analysis were “currently having their day in the sun” due to strong cyclical as well as structural growth trends.

It expects Halma's photonics-exposed businesses to grow at 10% a year, supported by broad demand around data centre growth and for cloud computing and artificial intelligence. In water, the broker expects growth of 6% through the cycle.