Morgan Stanley stays at 'equalweight' on Halma, calls valuation 'extreme'
Analysts at Morgan Stanley raised their target price for Halma's shares on Wednesday but told clients that the current valuation they were sporting was "extreme".
After rolling their estimates forward by a year and taking into account foreign exchange variations and peer multiples, the broker lifted its target on the shares of the safety, health and environmental testing equipment manufacturer's shares by 9% to 1,560.0p.
But despite what it said was the company's "excellent, multi-year track record on execution", the stock was changing hands on 23.6 times' Jefferies's estimate for the firm's financial year 2021 enterprise value-to-earnings before interest and taxes.
Indeed, Halma had delivered a second consecutive year of double-digit organic sales growth with higher margins and a return on capital employed of 16.4%.
It had also delivered a 40th consecutive increase of greater than 5.0% in its full-year payout.
"Management also noted a good start to FY20, with orders again running ahead of sales suggesting the recent slowdown in industrial indicators has had little impact on the business. Operationally the business continues to show good progress, but as highlighted in our November 2018 report, "Valuation Extreme – Time to Take Profits on Halma & Spirax", we see valuation as extreme."
Halma was also sporting an estimated 2021 price-to-earnings multiple of roughly 30.8, which was "an all-time high on both an absolute basis and also relative to CapGoods (>100% premium vs 5Y average ~60%)."
According to Morgan Stanley, there was now a risk of multiple compression, although the timing was hard to anticipate.
"We continue to see multiple contraction risk despite a solid earnings outlook but note timing this rotation remains difficult given it appears to be mostly driven by positioning (extreme shift to Quality / Defensives) and macro impacts such as movements on interest rates (strong relationship between falling interest rates and the absolute and relative valuation levels on the defensive names)."
Morgan Stanley kept its recommendation for Halma at 'equal weight'.