Company Reports

Wide-moat Assa Abloy is off to a slow start in 2024 with demand for its locking and physical access systems weakening in the first quarter. First-quarter organic revenue growth for the group softened by 2% year on year, tracking broadly in line with our full-year estimates that factor in headwinds from subdued construction activity in 2024. Organic sales for each of the group’s Americas, European, and Asia-Pacific opening solutions segments—which together account for roughly 50% of group earnings—declined in the range of 1% to 3%. Sales fell more significantly for Assa Abloy’s global technologies segment, down 9% organically in the first quarter.

Assa Abloy is the clear global leader in locking and physical access system markets, accounting for about 13% of supplies for the global addressable market—estimated to be worth around USD 100 billion. Assa Abloy’s installed-based business model confers the benefit of significant aftermarket sales—contributing about two thirds of annual revenue at high profit margins. Importantly, we think Assa Abloy’s strategic focus areas—customer relevance, product leadership, and cost-efficiency—work to protect, grow, and optimally monetise the global industry-leading installed base of locking and access systems it has amassed over many decades.

Wide-moat Assa Abloy delivered a fourth-quarter 2023 result that tracked a touch short of our expectations but nonetheless aligned with consensus forecasts. Full-year 2023 EBIT of SEK 22.2 billion fell 3% short of our forecast as operating margin progression proved less favorable than we’d previously credited—largely the result of organic growth that stalled in the fourth quarter. In particular, fourth-quarter sales for Assa Abloy’s global technologies segment weakened appreciably, falling by 7% year on year. Organic growth for the EMEIA and Asia-Pacific opening solutions segments also faltered, declining by 2% and 1% year on year, respectively. A softer-than-anticipated profit margin recovery for the Asia-Pacific opening solutions segment—following COVID-19 lockdowns that led to cost inefficiencies in 2022—also contributed to the weaker-than-anticipated operating profit outcome.

Soft residential construction markets are holding wide-moat Assa Abloy back in late 2023, with a meager 1% of organic growth delivered in the third quarter. The impact of weakened residential construction activity was most pronounced for the Europe, Middle East, India, and Africa, or EMEIA, and Asia-Pacific opening solutions segments, posting third-quarter organic growth of negative 3% and negative 7%, respectively. The performance of the global entrance systems segment was also hampered by weak residential sales, with organic growth flat in the quarter. Elsewhere, the global technologies and the Americas opening solutions segments delivered more appealing third-quarter organic growth of 4% and 3%, respectively. Strong nonresidential volumes were the major driver of the outperformance of the Americas segment relative to the Europe and Asia opening solutions segments, where residential sales were also subdued.

Assa Abloy shares screen attractively relative to our SEK 320 fair value estimate, which remains unchanged following a transfer of analyst. Our long-term thesis for the global leader in locking and physical access systems remains intact. Specifically, Assa Abloy is best positioned, in our view, to capitalise on the substantive growth opportunity from the increasing acceptance and uptake of electromechanical locking systems currently underway. We think investors presently underappreciate the full extent of the secular growth opportunity in front of Assa Abloy—the clear global locking and physical access industry leader—with shares trading at an appealing 22% discount to our valuation.

Assa Abloy is the clear global leader in locking and physical access system markets, accounting for about 13% of supplies for the global addressable market—estimated to be worth around USD 100 billion. Assa Abloy’s installed-based business model confers the benefit of significant aftermarket sales—contributing about two thirds of annual revenue at high profit margins. Importantly, we think Assa Abloy’s strategic focus areas—customer relevance, product leadership, and cost-efficiency—work to protect, grow, and optimally monetise the global industry-leading installed base of locking and access systems it has amassed over many decades.

Organic growth eased for wide-moat Assa Abloy in the second quarter to 3%—from an elevated 8% in the first three months of 2023—aligning with our full-year expectations for more normalized locking system demand in 2023 after an exceptionally strong showing in 2022. Nonetheless, Assa Abloy’s hastened pace of bolt-on merger and acquisition activity year to date leads us to raise our fair value estimate by 7% to SEK 320. A time value of money adjustment also contributes to the fair value estimate uplift. We increase our full-year EBIT and EPS estimates by a respective 10% and 7%—to SEK 21.3 billion and SEK 10.9—with bolt-on acquisitions adding handsomely to 2023 earnings. Assa Abloy shares screen attractively, trading at an almost 20% discount to our revised fair value estimate.

Assa Abloy has significant growth potential as it benefits from structural changes. There are two key drivers of future growth. First, we expect an industrywide shift toward software-driven products, expanding functionality, and linking locking systems with other building systems. Second, emerging-market demand will move up the quality curve to more sophisticated locking solutions, in which Assa Abloy is a leader.

Assa Abloy has significant growth potential as it benefits from structural changes. There are two key drivers of future growth. First, we expect an industrywide shift toward software-driven products, expanding functionality, and linking locking systems with other building systems. Second, emerging-market demand will move up the quality curve to more sophisticated locking solutions, in which Assa Abloy is a leader.

Assa Abloy's full-year results of 12% organic revenue growth and 15.3% EBIT margin were line with our expectations. The company's price increases during 2022, combined with a likely downward slope in cost per unit during 2023, should be supportive of margin expansion in 2023. The company raised pricing through 2022, meanwhile metals prices have been coming down. This gives us confidence in our 20-basis-point operating income margin expansion forecast to 15.5% in 2023. We forecast organic revenue growth slowing to a more normalized pace in 2023 to roughly 4%. Reported revenue will likely see negative effects from a likely reversal of 2022 currency tailwinds but conversely a positive contribution from acquisitions, particularly if the HHI acquisition finally receives regulatory approval. We note the company's appeal on the initial rejection will be heard in court in April. We maintain our wide moat rating and SEK 300 fair value estimate.

Assa Abloy continued to enjoy strong demand and also margin improvement in the third quarter. Sales grew 14% organically and the normalized EBIT margin was up 60 basis points to 15.6%. Operating leverage, cost-cutting, and price increases were all positive contributors. In line with our investment thesis, customer uptake of electromechanical locks continues to outpace the group's growth with electromechanical category sales up 16%, also above the roughly 12% prepandemic pace achieved during 2015-19. Electromechanical locks are an important driver of revenue growth due to higher prices of two times or more, than those of mechanical locks, and relative early-stage market adoption. We maintain our wide moat rating. Shares look attractive relative to our SEK 300 fair value estimate.

Demand for Assa Abloy's products remained strong in the second quarter and first half with revenue up 13% and 14%, respectively. A key driver for our thesis on the stock is the takeup rate of electromechanical locks globally. Electromechanical lock sales grew 18% organically, above the roughly 12% prepandemic pace achieved during 2015-19. Margins this year should be supported by price increases mitigating inflationary pressures. At the group level the EBIT margin declined by 20 basis points year over year to 15% in the second quarter. However, the first-half margin was still up by 10 basis points and ongoing price increases should add more margin support in second-half 2022. Supply chain issues continued in the second quarter, and many companies in our coverage have been building inventories as a defense against supply chain bottlenecks. Therefore, it was good that Assa Abloy managed to bring down working capital and inventory needs in the second quarter. This supported operational cash flow growth of 4% year over year, a nice turnaround from the 65% decline in the first quarter. We maintain our wide moat rating. Shares look attractive relative to our SEK 300 fair value estimate.

Assa Abloy has significant growth potential as it benefits from structural changes. There are two key drivers of future growth. First, we expect an industrywide shift toward software-driven products, expanding functionality, and linking locking systems with other building systems. Second, emerging-market demand will move up the quality curve to more sophisticated locking solutions, in which Assa Abloy is a leader.

Assa Abloy posted strong first-quarter results. Revenue increased by 14% organically at group level while the EBIT margin expanded 40 basis points to 15%, with some support from currency tailwinds. However, the company generated SEK 558 million in free cash flow during the quarter, well below the SEK 2.2 billion reported a year ago, due to higher inventory spend to secure component supplies for customer orders. We maintain our wide moat rating. Shares look attractive relative to our SEK 300 fair value estimate.

Wide-moat Assa Abloy beat the fourth-quarter company-provided consensus operating profit margin, as well as our forecasts, which led to a 5% rally in shares at the time of writing. Shares looks attractively priced compared with our SEK 300 fair value estimate. The 15.7% operating profit margin for the group expanded by 80 basis points year over year despite a 60-basis-point headwind from the extraordinary inflationary environment. Fourth-quarter revenue growth was strong with a 10% organic increase, with operating leverage also helping margin improvement.

A recent pullback of Assa Abloy's shares offers 20% upside from our increased fair value estimate of SEK 300 per share. We expect 14% earnings growth during 2022-25, including acquisitions. We've become more optimistic on the expansion of Assa Abloy's addressable market, expecting an acceleration in the pace of electromechanical lock adoption to 2% incremental penetration a year from an estimated 1% over the last several years. Relative to mechanical locks, which command 85%-90% of the market, electromechanical locks sell at twice the price or more, but generate a similar operating profit margin. Customers are willing to pay higher prices due to the greater perceived value of the product with benefits of greater access control and convenience. We forecast electromechanical locks climbing the innovation adoption curve from the current early-adopter phase to the early-majority phase over the next 10 years. In the combined Europe and U.S. markets by 2031, we expect adoption rates to rise to 30%-35% from the current 8% and 15% in residential and nonresidential buildings, respectively. Assa Abloy's wide moat stems from top brands that lower customer search costs. Product innovation reinvestment closes the gap between competitor product benefits and search costs. Earlier gains in penetration adoption rates create a leveraged effect on Assa Abloy's potential profit pool: a 2% adoption rate bump expands the addressable market by 3% due to the small starting base.

Assa Abloy has significant growth potential as it benefits from structural changes. There are two key drivers of future growth. First, we expect an industrywide shift toward software-driven products, expanding functionality and linking locking systems with other building systems. Second, emerging-market demand will move up the quality curve to more sophisticated locking solutions, in which Assa Abloy is a leader.

Assa Abloy's third-quarter revenue was in line with our forecasts, and the adjusted operating profit margin was slightly lower, by 20 basis points, coming in at 15% excluding one-off items. The company indicated growth could be slower next quarter with more normalized demand in Europe and North America but also weakness in Asia due to increased coronavirus-related restrictions. Shares were trading 3% lower at the time of writing, offering some moderate upside to our fair value estimate. Our wide moat rating remains intact.

Should the Chinese property market spiral into lower property prices and sales and a broader developer liquidity crunch as a result of Evergrande's potential collapse, we believe the near-term credit loss risk for European capital goods suppliers will be moderate and manageable. From a valuation standpoint, the greater risk is a step down in medium-term Chinese property market growth prospects if banks tighten lending to property developers. For now, however, we are making no changes to our ratings or valuations.

Based on our initial calculations, Assa Abloy's announced deal to buy HHI would be modestly accretive to our fair value estimate by about 4% and represents a long-term bet on the United States residential market adoption of smart and digital locks. Assa Abloy's U.S. exposure has been weighted toward nonresidential, unlike its other geographies. However, we think increasingly its product portfolio of digital and smart locks offers applications suited for residential and nonresidential buildings. HHI gives Assa Abloy greater exposure to the U.S. residential market, on the back of the August Home acquisition in 2017. HHI's product mix is only 20% electromechanical and the company has strong distribution exposure to residential-oriented channels such as home improvement and e-commerce. We see the distribution channel exposure as an opportunity to sell Assa Abloy's broad smart and digital lock portfolio. HHI also brings some smart-lock products that could be leveraged across Assa Abloy's residential base outside of the U.S. However, for now we are not modeling in revenue synergies until we have more understanding of the potential for cross-selling between the two business. We maintain our wide moat rating and fair value estimate.