An Attractive Entry Point...
Updated: Apr 23, 2020
Why we like Assa Abloy…
Swedish-listed Assa Abloy is the global leader in access solutions, generating annual sales of SEK 84bn (£7bn) from a broad range of products including doors, sensors, locks, alarms, fencing, gates, access control systems, identification technology, and entrance automation. Revenue is split 25% residential and 75% commercial/institutional, while new construction accounts for one third of sales and aftermarket for two thirds.
We believe the long-term outlook for the market is attractive, driven by increased demand for security, growing urbanisation, increased emerging market wealth, the shift to new technologies, the development of sustainable buildings, and changing market regulations.
In particular, the gradual replacement of mechanical locks with digital, electronic, and mobile security solutions provides a long-term growth opportunity, with increased sales value per unit (double the average selling price) and recurring revenue from aftermarket service and upgrades (the products last half as long) and the prospect of higher margins. The US, in particular, provides a huge growth opportunity given that penetration of digital locks is currently less than 10% versus the industry pioneer Korea at 90%.
Assa Abloy is well placed to take advantage of these trends – the group owns a portfolio of well-known brands, such as Yale, Union, Lockwood and August, with a large installed base and strong position in distribution channels. In the home delivery market, Assa Abloy is one of two suppliers of smart locks to the new Amazon Key service and is well-placed to serve Google Nest. The company has a strong track record of innovation and aims to generate 25% of sales from products launched in the last three years.
The group is targeting annual sales growth of 10% from a combination of organic and acquired growth. Although the group is larger than its three main peers combined, it only has a 16% market share, and so there is plenty of scope for further consolidation through acquisitions, with 15 deals being targeted each year including one relatively large one.
On the cost side of the equation, the group continuously seeks to reduce its breakeven cost, with the aim of generating an operating margin of 16%-17% over the business cycle. The company has just launched a new efficiency programme, its seventh. This will involve the closure of around 50 offices and factories, the outsourcing of non-core activities, increased automation through robotics, ongoing consolidation of suppliers, and the selection of lower cost raw materials. The programme is targeting SEK800m (£70m) of savings by 2021, at a cost of SEK1.5bn (£125m), with a pay-back of less than three years.
Assa Abloy has a robust balance sheet (1.9x net debt to EBITDA), attractive returns, strong cash flow generation, and a consistent dividend paying track record. Over the last few months, the group has seen high level management change, with the new CEO and CFO expected to continue with the existing strategy and generate attractive long-term returns for shareholders.