Halma PLC (LSE:HLMA) is likely to need to make larger acquisitions in order to meet its 10% earnings growth targets, which is too risky a prospect for UBS, which has taken the shares off its ‘buy’ list.
Instead, the Swiss bank recommended buying Spirax-Sarco Engineering (LSE:SPX), supported by a history of outperformance and with growth longer-term supported by decarbonisation opportunities.
Shares in Spirax have de-rated 40% from their peak, and the analysts think the acquisition-built Electric Thermal Solutions (ETS) division offers "a clear macro catalyst", while further investment is being made "with the strategy of innovation and capacity expansion to meet decarbonisation demand".
As for Halma, UBS noted that that the FTSE 100 health-and-safety technology group has been successful in delivering against its 5% target for organic growth in terms of revenue and profit, but acquisitive growth has underperformed modestly at 4.3% over the past decade.
“Assuming that the long-term targets are not changed, and against a backdrop of moderating organic growth, we see it as plausible that larger M&A,” analysts said in a note on Tuesday.
With UK exposure of 18% of revenues the largest exposure among his sector coverage, analyst Rory Smith said “any weakness in UK infrastructure growth may weigh on sector margins”.
In the near-term, Halma's share valuation is “likely to follow the macro, presenting a potential valuation catalyst”, he added, but within UBS’s cohort of ‘defensive quality’ companies, the analysts prefer the “decarbonisation story and mechanical margin uplift” at Spirax-Sarco Engineering (LSE:SPX).
Halma was therefore downgraded to ‘neutral’ from ‘buy’, with share price target cut to 2,470p from 3,300p, while Spirax was upgraded to 'buy' from 'neutral', with target upped to 13,700p from 11,110p.