Assa Abloy Earnings: Weak Residential Construction Activity Weighs on Organic Growth

Soft residential construction markets are holding wide-moat Assa Abloy ASSA B 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.

We’ve trimmed our full-year 2023 top-line forecast in accordance with the prevailing near-term weakness in residential locking end markets. Still, we raise our full-year EBIT forecast by 4% to SEK 22.9 billion with the recovery in Asia-Pacific profit margins—which were weighed down in 2022 by pandemic-related inefficiencies—tracking well ahead of our prior expectations. The positive sales mix shift for the global technologies segment also contributes to our upgraded 2023 EBIT forecast. Shares continue to screen appealingly, trading at a 29% discount to our unchanged SEK 320 fair value estimate.

Recent increases in interest rates are having a substantial impact on residential construction activity. In the U.S.—Assa Abloy’s most important geography, accounting for a touch over 40% of sales in 2022—we expect total housing starts to decline by approximately 10% in 2023 to about 1.4 million units. We expect construction activity to remain weak into 2024—with a further 4% drop in housing starts forecast—before a cyclical recovery in homebuilding takes hold in 2025.