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Both holdings bring together a large number of companies active in a variety of specialties. Let's take a closer look at their various activities, to give you a better idea of what makes them tick.
Halma operates in three sectors: safety, environment and analysis, and health.
In safety, Halma's companies focus on fire prevention (smoke, heat and CO2 detectors and fire extinguishing equipment), as well as public safety (sensors, radar and emergency communication systems used in public spaces such as schools, hospitals, etc.).s in public spaces such as elevators, parking lots and freeways), worker safety, mainly in potentially dangerous industrial and commercial environments, and finally the protection of critical infrastructure and assets with, for example, pressure valves, leak detection and electrical testing systems.
This division is the largest, accounting for 41% of sales, or £823.8 million. It is also the most profitable division, with an EBITDA margin of 23.3%. However, the difference with the other two activities is slight, since the environment and health & analysis divisions achieve EBITDA margins of 22.5% and 22.8% respectively.
The Environment & Analysis (E&A) segment focuses on water and air analysis and treatment equipment, optical and spectral imaging machines, and environmental resource infrastructure monitoring technologies that detect hazardous gases and their proper functioning. E&A is our fastest-growing segment. For example, in the last financial year, revenues climbed by 19.3%, while Safety grew by 10.5% and Health declined by 0.6%. This was due to growth in the sector as a whole, particularly in the photonics business within the optical analysis sub-sector, as well as very strong overall demand in the USA and the UK.
Incidentally, the United States is the Group's main market, accounting for 44% of sales. Continental Europe and the UK combine for 35% of revenues. The remainder is divided between Asia-Pacific and the rest of the world - notably Africa - with 13.5% and 3.9% of sales respectively.
In the healthcare sector, Halma offers components, devices and systems that provide a variety of information and analyses, notably in eye health, technologies for in vitro diagnostics and life sciences R&D, as well as therapeutic tools and materials to treat various clinical specialties.
As mentioned above, the division has experienced a lack of growth in recent years. Inventory build-up by original equipment manufacturers (OEMs) during the pandemic and budgetary constraints on healthcare providers largely explain this underperformance. However, the order book remains strong, and the situation should normalize in the coming quarters.
Companies owned by Halma in its fields of activity (source: Halma Annual Report 2024)
Halma's finances are characterized by steady revenue growth and stable but high margins. Sales CAGR over the 2015-2024 cycle stands at 12.1%, reaching £2.03 billion. Steady margins and the - very - meagre stock options paid out to management keep the earnings-per-share curve well under control.
We also appreciate the very strong cash generation. Cash flow from operations almost single-handedly covers the cost of acquisitions, the payment of a steadily rising dividend year after year, and the meagre share buy-backs.
All in all, the accounts are very good. The cost structure is optimized, and the figures seem to indicate that acquisitions are well integrated. The main expenses are in marketing. Here again, we can be satisfied, since these are growing at a slower pace than sales, without impacting sales growth. Finally, Return on Equity (ROE), one of the key ratios for assessing the profitability of a holding portfolio, exceeds 16%.
Halma now has a market capitalization of almost £10 billion. Its valuation is high, but justified by the good arguments we have just mentioned.
Halma: steady and constant (source: MarketScreener)
Like its peer, Diploma operates in three sectors: control, sealing and life sciences.
In control, Diploma companies supply low-voltage wires and cables (57% of the segment), electromechanical solutions and high-performance interconnection products (23%), reparation, maintenance and refurbishment services for industrial automation equipment (5%), specialty adhesives (3%) and a wide range of fasteners, inserts and components for industry (12%). The division accounts for 44% of Diploma's total revenues, and is also the most profitable, with an adjusted EBITDA margin of 24%.
In sealing services (39% of revenues), Diploma offers custom kits, repair accessories and cylinders for heavy machinery maintenance and repair (MRO), as well as components and technical solutions for original equipment manufacturers (OEM). Diploma also distributes products for hydraulic power transmission and mechanical engineering. Last year, this branch enjoyed the strongest growth, with revenues up 26%.
Finally, in healthcare solutions, Diploma supplies surgical and endoscopic tools to healthcare providers, mainly in Canada (42%). European companies supply consumables and equipment to laboratories. Finally, in Australia and Asia, Diploma entities distribute pathology diagnostics and medical research solutions.
Diploma generates 42% of its revenues in the United States, 39% in Europe (including 17% in the United Kingdom), 10% in Canada and 9% in Australia and New Zealand.
Financially, Diploma is growing faster than Halma over the last 10 years, with a CAGR (weighted average annual growth rate) of 16.4%. This is even more striking since Covid, with sales rising from £538 million to £1.2 billion last year. The company's outsider status and more aggressive strategy in terms of debt and acquisitions explain this situation. Over the last three years, acquisition costs have far exceeded cash earnings from operations, while the situation is the opposite for Halma. Even so, risk is well under control, since debt is not exorbitant and remains within perfectly acceptable standards. In this respect, we can rely on Managing Director Jonathan Thomson, who used to head up the finance departments of subsidiaries of Compass, the catering giant.
As far as he and his team are concerned, it's worth noting the non-excessive amounts they draw from stock options, and their rigour in keeping clean financial statements. Free cash flows - the money actually available at the end of a financial year, once capital expenditure (the famous Capex) has been excluded from the company's operating cycle - are growing faster than net income, and ROA and ROE ratios are close to Halma levels.
All in all, both companies are of high quality. To take a position - because a winner is needed in a duel - we could give a slight advantage to Diploma, which continues to take full advantage of its portfolio's trend since Covid. Diploma's growth is stronger, as is demand, mainly in the control and sealing divisions. However, the two stocks are trading at almost similar valuation multiples, between 34 and 38 times earnings for this year, between 33 and 34 times free cash flow, and between 4.4 and 4.7 times sales including debt. Quality often comes at a high price.
Diploma: strong acceleration since Covid (source: MarketScreener)
