Continental Europe Region
ASSA ABLOY
Stock Pitch
ASSA-B.ST
15.04.2015
ASSA ABLOY
COMPANY OVERVIEW
Domicile: Stockholm, Sweden
MCAP: 203.786bn (SEK)
3Y Growth: 180.21 %
Current Price: 549.50 (SEK)
6m Target Price: 650.00 (SEK)
ASSA ABLOY is a worldwide security solution
provider, operating in 70 countries across the globe.
As a result of the 1994 merger of the Swedish
company ASSA and the Finnish company ABLOY, the
market leader ASSA ABLOY known today was created. Since its formation, ASSA ABLOY has expanded
through a combination of strong organic growth and targeted acquisitions, transforming itself from a
traditional regional company into the leading international security company. Today ASSA ABLOY provides a
host of intelligent access control solutions, ranging from mechanical and electromechanical locks to digital
door locks and industrial high-security fencing and gate opening solutions.
INVESTMENT RATIONALE
We view ASSA ABLOY as a very attractive investment opportunity due to their unique structure and industry
position. ASSA ABLOY is not just a market leader, it is also the industry’s only company operating on a truly
global scale. The company benefits from broad customer and regional diversification and at the same time
2/3 of revenue originates from the aftermarket, which has proven to be very resilient in times of economic
crisis. This unique position allowed ASSA ABLOY to deliver strong financial results of stable and high operating
margins, leading to consistent and material free cash flow generation.
Among companies that compete in some common markets, ASSA ABLOY outperforms them in terms of
financial position and growth. In addition, ASSA ABLOY is committed to achieving growth through organic
means as well as acquisition activity. Its previous growth shows that ASSA ABLOY has the potential and
experience to maintain this activity. During the recent financial crisis, ASSA ABLOY proved to be resilient to
such external variables, due to its diversification and grip on the aftermarket. As the world economy recovers
from the downturn and construction industries begin to flourish again, there is considerable upside potential
for ASSA ABLOY to continue expanding its revenues and profits. The share price has experienced growth over
the past few years (+180% 3-Year growth), and we expect this growth to continue, especially as the economic
outlook improves.
MARKET POSITION
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The lock and security industry in which ASSA ABLOY operates varies from country to country depending on
legislation and regulation in the region. Markets are somewhat fragmented and incumbent firms best meet
customer needs due to their in depth knowledge of demand and the challenging legislative environment.
Boasting over 200 acquisitions in 20 years, ASSA ABLOY has gained a strong market position. The reasons
for the acquisitions include: entering new markets, obtaining complementary products, accessing
technology; all of which contribute to the strengthening of ASSA ABLOY’s market position. The company’s
brand strategy consists of combining the individual product brands with the ASSA ABLOY logo. In 2000,
ASSA ABLOY acquired HID, a Texan based access control manufacturer. By acquiring Yale Intruder security, a
lock company with headquarters in Connecticut, in the same year, ASSA ABLOY doubled in size.
ASSA ABLOY’s competition consequently consist of medium sized companies, operating on a regional scale
only, with a large share of them being family owned. Its closest international competition involves Allegion
(Ireland), Kaba (Switzerland), Eastern Company (USA) and Stanley Black & Decker (USA). All have suffered
recently from deteriorating margins and the majority experienced negative sales growth over the last 12
months. Product and price pressures from smaller regional competitors remain subdued as these
companies, often family owned, suffer from diseconomies of scale and lack of access to debt markets to
finance extensive R&D.
ASSA ABLOY remains competitive in its industry by keeping its cost structure low and flexible through a
programme following continuous efficiency improvements. In addition, it differentiates itself from
competitors in many ways. Firstly, ASSA ABLOY benefits from brand loyalty, arising from its strong market
shares and highly recognised brand. Secondly, ASSA ABLOY remains close to its customers and uses its
knowledge of local requirements to ensure efficient and high quality operations. Finally, ASSA ABLOY has
increased research and development spending to around 3% of sales per year. This innovation puts it on
the forefront of the market and ensures that ASSA ABLOY exploits opportunities in the fast pace
environment.
It is the penetration of local, regional and global security markets that enables ASSA ABLOY to exploit mega
trends, such as the need for increasing security, urbanization and technological development, with
remarkable upside potential in the Emerging Markets.
MANAGEMENT STRUCTURE & INTEGRITY
ASSA ABLOY strives to maintain a high level of integrity within its activities. It aims to generate long-term
returns for both shareholders and stakeholders. Its responsibility and sustainability approaches accompany
the company’s strategy and vision and have the wider aim of improving the position of shareholders and
stakeholders. In terms of ASSA ABLOY’s sustainability targets, it wishes to achieve a world-leading market
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presence, product leadership and cost efficiency. ASSA ABLOY achieves this with its commitment to
improving its environmental impact and focusing on the sustainability of its products and actions.
GROWTH PROSPECTS AND RISK
In 2014, ASSA ABLOY experienced 11% growth, 3% of this was organic growth and 8% was due to
acquisition activity. Its acquisition activity is designed to increase global presence, expand the product
portfolio and give ASSA ABLOY access to a wider range of technology. Recently developed products
account for a large part of the company's organic sales growth whilst ASSA ABLOY continues to develop
innovative security solutions with new patents and locking devices. Research and development is at the
heart of this expansion with spending in this business area increasing by more than 160% in the past
decade and showcasing the company's desire to create new technology.
ASSA ABLOY’s growth prospects in the developed world focus on more complex security systems including
further expansion into the home automation market. The firm also has plans to grow their market share
through contracts with larger international clients and development of high-tech wireless technology for
both personal and corporate usage. Systems such as 'Aperio' and 'Smartair' enable wireless connectivity with
existing control systems and proximity access for wire-free door units, representing the future of lock
systems.
Furthermore, ASSA ABLOY’s interest in Bluetooth technology has great potential to open up links with wellestablished brands such as Apple. ASSA ABLOY is also the provider of all major locks that are currently
being installed to allow hotel room access via the Apple Watch. Whilst many of its competitors compete
with heavy and expensive magnetic locks, where margins have recently been decreasing, ASSA ABLOY is
continuing to pioneer new technology such as electronic IDs and enhanced passport security contributing to
new and exciting growth prospects.
In emerging markets ASSA ABLOY is hoping to benefit from increasing urbanization, bringing with it greater
demand for sophisticated security systems. Additionally, a wealthier consumer base in the developing world
is augmenting the need for improved personal locking devices and large manufacturers are demanding
higher quality security systems for plants and factories abroad. These areas present excellent development
prospects and will serve to improve ASSA ABLOY’s financial position and global reputation in the coming
years.
Since ASSA ABLOY sells its products in countries worldwide and has subsidiaries in over 70 countries, the
Group is exposed to the effects of exchange rate fluctuations. It is primarily affected by exchange rate
exposure when income statements of foreign subsidiaries are converted to Swedish Krona. Currently, ASSA
ABLOY is benefiting from a favourably weak Krona, which will, according to company estimates, help boost
revenue by more than 10% over next financial quarter.
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Further macroeconomic risks include price and wage changes, especially in countries where it has
operations. Countries such as China are not necessarily stable and can change legislation without much
prior warning. Given that ASSA ABLOY has operations in these unstable economies, they are exposed to
risks in terms of prices, wages and legislation. In addition, the Asian housing market appears to be cooling
off, which may pose a threat to the growth forecast by ASSA ABLOY for this region. However, much of ASSA
ABLOY’s business comes from the after-market, meaning that this risk may be over exaggerated.
On a microeconomic level, the company is exposed to fluctuations in the prices of raw materials. These
fluctuations could put upward and downward pressure on ASSA ABLOY’s prices. Changes in prices lead to
changes in demand, meaning that ASSA ABLOY will be unable to forecast accurately. ASSA ABLOY may also
decide to absorb the effects of changes in prices of raw materials, potentially affecting its profit margins. In
addition to pressure felt from prices in raw materials, ASSA ABLOY may feel pressure from potential and
upcoming competition. ASSA ABLOY has the clear advantage of being the market leader, which will reduce
the risk significantly.
FINANCIAL POSITION
ASSA ABLOY has two key financial goals that contribute to its success: (i) 10% annual growth (organic and
acquired) and (ii) a 16-17% operating margin. ASSA ABLOY consistently meets these goals over the
economic cycle, with fluctuations narrowing in recent months due to a stabilising business environment and
cost reduction efforts.
Due to its international presence and cutting edge technology, ASSA ABLOY is delivering strong financial
results. All of its 5 divisions have reported sales growth and contribute to the continuing growth (since
2010) of its total revenue, which reached 56.843bn SEK in 2014 (+17.2% YoY). After a minor decline in net
income in 2013 from SEK 5.17bn to SEK 4.78bn, due to a strategy restructuring, net income has reached a
new all-time high of SEK 6.44bn. The profit now margin lies at 15.3%, again a record for ASSA ABLOY. 5year dividend growth as a result of growing profitability is 9.63%.
ASSA ABLOY’s current ratio is 1.12. The Total Debt to Total Asset ratio is down to 0.25. These ratios
highlight ASSA ABLOYS strong financial position, with risks of financial distress remaining subdued. Return
on Capital Employed is 16.9% and Return on Equity is 19.8%, both improved YoY signalling efficiency gains
linked to cost saving initiatives. Taking into account the acquisition of 20 new companies (which added sales
of 5.4%) in 2014, ASSA ABLOY is set to continue the strong financial performance, which was a key driver
for the 75% growth of its stock price over the last 6 months. Its earnings per share increased by 17%.
ASSA ABLOY’s strong cash position, decreased leverage and access to a high-quality EUR900m revolving
credit facility will provide liquidity for future acquisitions as well as further R&D efforts.
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SHAREHOLDER STRUCTURE
ASSA ABLOY’s shares are split into A shares and B shares. Investment AB Latour, who has 29.5% of voting
rights, owns 9.5% of ASSA ABLOY shares. 5% of shares are series A shares, and of these 72% are held by
the largest shareholder Investment AB Latour. Each A share carries 10 votes and each B share carries one
vote. All shareholders have equal rights to ASSA ABLOY’s assets and earnings.
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