Amity SRI Company Profile - Halma & Smith

This information is for Investment Professionals only and should not be relied upon by private investors.
Ecclesiastical SRI Expert Briefing – June 2013
Amity Fund SRI Company Profiles
Introduction
The Ecclesiastical range of SRI screened ‘Amity’ funds hold over 250 different company stocks and debt instruments across their
portfolios. As well as having a strong and compelling investment case, each holding must be researched and approved by the SRI team.
In this Expert Briefing our SRI team outlines the case for two UK mid-cap stocks which, although not familiar names, are quietly reinventing
their business models around a sustainability agenda: Halma (Amity UK) and DS Smith (Amity UK & Amity International).
Halma
Halma can trace its history back to 1894, beginning life as The Nahalma Tea Estate
Company in Ceylon, and later switching to rubber production. Listed in 1972, by which
time it had long exited commodities, Halma became focused instead on a series of
mechanical and electrical engineering companies. Today it employs just over 4,000 people, and operates through 40 subsidiary
businesses in 23 countries; its markets centre on specialty safety, health and environmental technologies.
Halma operates in four discrete sectors: process safety, infrastructure safety, medical and environmental & analysis.
Four Business Segments
The company achieved revenues of £579.9m in 2012 across its four divisions:
Process Safety (21%), Infrastructure Safety (35%), Medical (17%) and
Environmental & Analysis (27%). The company’s portfolio of businesses all lend
themselves as being seen as strong ethical positives. The Process Safety
division is concerned with safety diagnostics in the area of flammable and
hazardous gases as well as explosion protection devices. Infrastructure Safety
manufactures sensors for lifts and automatic doors in transportation and buildings. It also supplies fire and smoke detectors, security
devices and audible/visual warning activators. In Medical, Halma manufactures devices used principally in eye health and eye surgery.
It also supplies instrumentation such as pumps, probes valves and compressors used in medical diagnostics. Finally, Environmental &
Analysis is a market leader in opto-electronic technology used in monitoring water networks, UV disinfecting and water quality testing.
Investment Proposition
Halma is a good example of a company where the ethical
positives and the investment proposition go hand-in-hand. A
leader in many of its chosen markets, Halma has achieved 5
year average organic growth of 8%+. It has retained record
profit growth through the economic cycle with return on sales
averaging 16% for 25 years+. Halma also has a record of
sustained dividend growth of c5% for 30 years+. Demand is
underpinned by long-term resilient growth drivers in each of
its specialist markets, with Asia especially strong. The
company has a very strong balance sheet allowing active
portfolio management and carefully targeted acquisitions.
Total Shareholder Return (TSR) over five years was 203%
compared to 114% for the FTSE 250, and 180% for the FTSE
350 Electronic & Electrical Equipment sector.
Source: Halma
June 2013

Key Products
Halma is one of the world’s leading manufacturers of fire detectors, protecting people in large buildings such as schools, hospitals and
offices. Over 3 million are sold annually in more than 100 countries. Halma gas detectors include portable products to protect entire
industrial sites from gas leaks and flammable or toxic gases. A particular application is detectors used in confined spaces such as
tunnels. Halma manufactures non-chemical water treatment systems based on UV technology for disinfecting drinking and waste
water, swimming pools, and industrial water supplies, such as food processing and electronics manufacture. The company is a leading
maker of leak detection instrumentation in underground water pipes, sold to utilities world-wide. The company’s medical specialism is
ophthalmic instrumentation used by eye surgeons and optometrists to test vision and diagnose disease. Principal products include
examination lenses, ophthalmoscopes, and pressure testing instrumentation.
Halma has developed a specialist portfolio of businesses which contribute towards resource efficiency, monitoring changes in the
environment, reducing energy, saving water, minimising waste and checking emissions and leaks. The company’s own footprint is
relatively modest, and is subject to reduction targets in the areas of energy, waste and water. Approximately 22% of Group revenues
are currently ISO14001 accredited, and this is being further developed. Despite strong growth the Group has managed to reduce
carbon emissions by 9% over two years.
Halma Positive Amity Score
The company scores positively across seven of the nine Amity pillars, particularly healthcare and environmental performance &
management. Ecclesiastical Investment Management has supported all recent governance proposals and does not view executive pay
as problematic.
Business Practices Community Governance
Education Environmental Healthcare
n/a STRONG STRONG
Human Rights Labour Relations Urban Regeneration
n/a
DS Smith
David S. Smith began life in 1940 as a manufacturer of packaging cartons, and was listed on
the London Stock Exchange in 1986. The company remained a dedicated paper packaging
producer until the late 1980s when it acquired two plastic packaging businesses. The
company is now a leading manufacturer and supplier of corrugated packaging in Europe,
and plastic packaging world-wide, employing over 10,000 people globally. Our interest in
DS Smith is linked however to its recent transformation as the leading supplier of recycled
packaging for consumer goods. Consequently virgin paper manufacturing is being wound down in favour of a focused business strategy
manufacturing from recycled product; a business model for sustainable growth.
Three Business Segments
The company achieved revenues of £1.9bn across its three core divisions in the financial year 2011/12: UK Packaging, Continental
European Corrugated Packaging and Plastic Packaging. DS Smith excites us
because its entire business model is now centred on manufacturing from
recycled waste, as the company states, this provides the raw material or ‘urban
forest’ to grow a sustainable packaging business. The virtuous cycle allows both
DS Smith and the end user to reduce waste and carbon emissions with lower
associated energy costs throughout the supply chain.
June 2013

Sustainability Assured
In 2011/12 DS Smith recovered 1.8m tonnes of waste packaging from contracts with the likes of Tesco, Sainsbury M&S and Wm.
Morrison. The company’s integrated model sees it collect and process waste direct from customers, which provides the raw material
for its paper mills. In the UK, all raw fibre used in the manufacture of its corrugated case material (CCM) is sourced from waste product
and this model is being replicated in continental Europe. Approximately 1.1 tonnes of waste are required to produce 1 tonne of new
product, so there is very little waste. In plastic packaging, DS Smith has developed environmentally friendly liquids packaging, with the
outer shell made from 100% recycled fibre and uses up to 70% less plastic than regular ‘blow-moulded’ jugs. The bottle is 100%
recyclable and compostable.
Investment Proposition
DS Smith’s transition to a global leader in
recycled products has seen strong underlying
revenue growth and higher operating profit
margins; the cost of capital employed has
reduced to 5% of revenue, down from 8%.
Operating profit margin was 7.2% - up 90 basis
points in 2011/12. Operating profit increased
from £75m in 2009 to £142m in 2012. An additional £13m in procurement savings were achieved. Return on average capital employed
increased to an impressive 14.6%, at the top end of its 12-15% target range. The company exhibits strong cash flow and a robust
balance sheet allowing for dividends to grow by 31% in 2011.
Sustainability Performance
DS Smith supports our focus on companies with business models tuned towards holistic sustainability propositions, and this approach
is paying dividends in the company’s own environmental performance, given its diversion of product from landfill. Carbon emissions
were reduced by 3% in absolute terms in 2012, and 16% relative to revenue. DS Smith has set a target to reduce emissions, waste to
landfill and water consumption by 20% over 10 years from 2010 and this is broadly on track. Nearly half of the company’s own waste is
recycled, with only 12% now directed to landfill and this is reducing year on year.
DS Smith Positive Amity Score
Source: FT: 5 year comparison DS Smith vs. FTSE250
The company scores positively across six of the nine Amity pillars, particularly environmental performance, labour practices (health &
safety) and corporate governance.
Business Practices Community Governance
GOOD
Education Environmental Healthcare
n/a STRONG n/a
Human Rights Labour Relations Urban Regeneration
GOOD
n/a
Conclusion
Halma and DS Smith represent two UK Mid-Cap stocks in the FTSE350 that we regard very positively. Both are long-established
businesses with strong performance track records, but recently both have structured themselves to seize opportunities in the
sustainability market-place. These businesses therefore represent not only strong corporate responsibility plays, but have business
models strategically centred on sustainability itself. Both also represent compelling and interesting long-term investment stories.
June 2013

Ecclesiastical’s Amity SRI Team
We operate a specialist in-house Socially Responsible Investment (SRI) team who carry out thematic and stockspecific
research to identify ethically responsible investment ideas. Headed up by our Senior Socially Responsible
Investment Analysts Ketan Patel, CFA, and Neville White, the team are also responsible for creating an on-going
dialogue with companies. This allows us to engage in discussion on a variety of ethical and socially responsible
investment issues. For investors, it’s an added layer of assurance that client money is being invested in companies
that are operating in a socially responsible and sustainable way.
Ecclesiastical - Ethical Investment Specialist
Since launching the Amity UK Fund in 1988, Ecclesiastical has taken a leadership role in ethical
investments, through our ongoing research, engagement practices and our strong fund
performance. Consequently, we were delighted to receive the Moneyfacts Award for Best Ethical
Investment Provider 2012. This is the fourth consecutive year we have won this award. We are
particularly pleased to win this award as it is voted for by the Financial Adviser community. In 2012,
the Amity UK Fund was awarded Best Ethical Investment Fund in the inaugural Investment Week
Climate Change and Ethical Investment Awards, and this year we were awarded Money Observer
Best Ethical-SRI Bond Fund for the Amity Sterling Bond Fund. Today we offer four SRI funds under our
Amity banner, covering the major markets and investment classes.
Further information
For further information on Ecclesiastical’s SRI range of Amity Funds please contact your Ecclesiastical Business
Development Manager, visit www.ecclesiastical.com/ifa or call our IFA support team on 0845 604 4056.
Please note that the value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations, you may not get back
the amount originally invested. Ecclesiastical Investment Management Limited (EIM) Reg. No. 2519319. Registered in England at Beaufort House, Brunswick
Road, Gloucester, GL1 1JZ, UK. EIM is authorised and regulated by the Financial Conduct Authority.
June 2013