Summary
- I've written about Assa Abloy plenty of times in the past, presenting the company as a low-yielding, but quite excellent overall performer with solid fundamentals.
- Going into 2023, my thesis for the company is positive - though valuation remains a concern here.
- Assa Abloy provided a record performance during the year, with strong development.
Dear readers/followers,
Assa Abloy ( OTCPK:ASAZF ) is a company I've been reviewing for some time, and I do have a position in the business. However, the low yield and the valuation we've seen for the past few years have been somewhat prohibitive to making excellent investments. Despite being a "BUY" last time I wrote about Assa Abloy, the company has somewhat underperformed in the market here - though the direction was certainly correct, all things considered.
Seeking Alpha Assa Abloy Article (Seeking Alpha)
In this article, it's time to go for a calculation for the 2023E period and see where Assa Abloy might go from here. I say what I've said before. The company won't make you rich - it "can't" take $10,000 of your money and turn it into $1M in a short time - that's not how Assa Abloy works, given its size, maturity, and sales trends. But it can provide stability, a solid dividend, and non-trivial safeties and fundamentals.
Let's drill down on this here and see what we have.
Assa Abloy - Plenty of excellent results and KPIs for 2022
So, Assa Abloy. This company is fairly easy to understand because its area of operation is pretty much the largest, global supplier of intelligent access. This encompasses both opening and entrance automation, as well as master key systems, access control, authentications, and Data services. In almost every workplace I've ever worked, there has been some sort of access or locking system by Assa Abloy.
The company now holds brands such as Assa, Abloy, August Home, Besam, HID, Medeco, VingCard, Yale, HKC Security, Lockwood Locks, and many more. Several of these are global brands with international appeal. I was very curious to see how Assa Abloy would do in this market of increased inflation, costs, and SCM issues. In my mind, Assa has good pricing power because while there are alternatives, the depth of its market share and integration would make it complicated for a client to shift suppliers for its access solutions. Clients want uniformity and simplicity - at least, this was and is my assumption.
This assumption has been largely proven to be accurate. Assa has delivered very solid sales increases on an organic basis in almost every region - except APAC. This is further added to solid margin development, without any decline or issues in EBIT.
Furthermore, Assa doubled its operational cash flow during the quarter, while managing that 28% sales increase, and essentially managing flat margins both on a gross and net basis.
The implication of such numbers is that the company, through a mix of pricing actions, operational actions, and personnel actions has managed to either pass on or make up for every part of inflation or cost increase that has come the company's way - and this is a very impressive feat to manage in this environment.
Some quarter-specific highlights include the company being the smart ticket producer for FIFA (showcasing that it's not just all locks and doors) for the third consecutive time, with 2M paper tickets manufactured using an RFID inlay (among other things). Other wins is being the provider of electromechanical CLIQ solutions for gas networks, and delivering savings to clients the world over, including a manufacturing plant in Mexico. The company is also continuing to launch new and innovative versions of existing products, as well as new overall products, such as the Yale Unity Screen Door Lock, ThermaGuard, and others.
I want to highlight the company's operating margins because this is where I see major impressive trends.
That and the fact that the company has managed to keep solid operating profit trends on a TTM basis for 2022, despite the market situation. The company's M&A pipeline also continues actively with 8 M&As signed in 4Q22 alone, and 21 global M&As completed in all of 2022, adding over €700M in sales to the company's portfolio. At the same time, Assa is busily divesting as well, with a sale of Emtek and the Smart Residential business in the US and Canada. The company has reached an agreement for a sales price of around $800M, with not everything "done" just yet, but getting there. Some larger ones worth mentioning in terms of recent M&As include Janam...
...and D&D technologies.
In many ways, Assa Abloy is now acting like a global conglomerate in the field, managing and divesting as well as acquiring where necessary. They are global enough to dominate entire markets, pick the mergers they want that make sense for the business, and skip the rest. The company's sales, profit, and earnings numbers over the past 20 years confirm the stance that Assa Abloy is a very effective allocator of capital and an effective creator of shareholder value.
Take a look at these high-level 20-year trends.
Very little could ever dislodge or threaten this business's fundamental development. Even something like COVID-19 was barely a blip on the company's radar, despite it being possible to pick up Assa Abloy at an extremely attractive price at the time, which I, unfortunately, did not do to the extent that I should have been doing.
Despite the amount of M&A and portfolio actions, there's very little debt worth discussing. The company's ratios are absolutely solid Unlike many companies in Sweden, Assa Abloy does maintain S&P and Moody's credit ratings. Here we're looking at an excellent A- credit rating from S&P with a stable outlook. This rating has not been changed for over 2022 years when A- was assigned in September. Oh, there have been some changed outlooks and one credit watch during the financial crisis - but it never actually changed.
Even from a global perspective, maintaining an A-rating for that long must be seen as impressive.
Obviously, with such trends also come drawbacks. One of the primary drawbacks is the company's low yield. At a share price of 255/share with a 4.8 SEK dividend confirmed for 2022, that's a yield of not even 2%, in an environment where I will argue that the risk-free rate is easily approaching 4-5% globally. That's not all that great.
When you look at where the company is trading in terms of valuation, you do get the sense of that premium, and that it might not exactly be worth it.
Let me show you.
Assa Abloy's Valuation is stretched at over 21x normalized.
Assa Abloy comes in at less than a 5% EPS yield and an ADR P/E of over 21x. The company does typically trade between 21-23x, but it also doesn't often generate more than 4-6% EPS growth on an annual basis.
Now, if you forecast the company at 23-24x P/E, you can eke out a slim gain on an annual basis above market. Conservatively, this comes to double digits annually - barely.
And because it's technically higher than the market, this is not necessarily unattractive. However, there's also quite a bit of premium to that expectation, and even though the market is expecting 7-8% here, that's based on a 25% forecast failure rate on the negative side, even with a 10% margin of error, with most of those misses being the last few years. So there's a bit of ambiguity and uncertainty to some of those targets that make me somewhat uncomfortable buying the company at those levels.
Current analyst targets give the company room to grow. We have 21 analysts forecasting ranges starting at 250 to 320 SEK/share, with an average of 277. That's an 8.3% upside and could qualify as a "BUY".
However, only 5 out of those 21 analysts call the company a "BUY" despite this target average, with the vast majority either having HOLD, Underperform, or negative options - 14 analysts come in at such a recommendation.
Me, I can see based on current industry sales trends, vertical integration, and market position, that Assa will manage a 4-7% EPS growth. However, based both on peers and DCF, this doesn't imply a very positive thesis from the company from here on. I apply a discount of around 9.8-10.5% as I usually do these days, going for at least a 5.5% growth rate for the company. This gives us a relatively wide range of possibilities that go all the way up to 270 SEK/share, but also down to around 200 SEK. One thing that seems clear to me when I view these trends is that the 250+ SEK share price is optimistic, and based on the company retaining a certain amount of premium.
Even the analysts seem unconvinced that this is likely to happen. Combine this with the sub-par yield, and it seems clear that there is potential for better "BUY"s out there.
Now, Assa has a strong business model. I agree with Morningstar on the company's moat, which the service characterizes as "Wide". The reasoning here is due to switching costs, aftermarket sales, and the company's extremely high-quality brands as well as the relationships with installers and security system operators which have been built over decades.
Examples of buildings protected by Assa Abloy include the EU Parliament, the Mexico City Airport, The Rolls-Royce Aerospace Division in the UK, and the Whitney Museum in NYC - so there's plenty to like about this company, but at this price, the upside is starting to look a little "thin".
I'm willing to accept that we're looking at a double-digit upside - and because of this, the company actually still warrants a "BUY" - but it's a weak "BUY", and it comes with a disclaimer that we might see valuation compression going forward here.
Assa Abloy is the perfect example of the adage " You pay for quality ". There are plenty of NA/international examples of this as well, but this is the best example I can think of in Sweden besides some of the better-known investment companies. My latest target for Assa Abloy was a conservative 180 SEK/share price, though this was when the company was trading close to that fair value, and the 2022 period was somewhat unclear here. So this bump in fair value is one of the larger ones I've ever engaged in because my first target was so conservative.
I'm bumping Assa Abloy to 255 SEK/share here as a PT - but that comes with the assumption that you're really paying for that quality, and that your upside is barely double digits.
If you're fine with that, you can "BUY" here, and here is my current thesis for the company.
Thesis
- Assa Abloy is a global, market-leading provider of solutions in access, ID, locks, and passage systems. The company is an M&A-heavy, proven capital allocator with excellent fundamental safeties and a potential upside at a good valuation. At a cheap price, it's possible to deliver significant market outperformance by investing in the company.
- However, at 255 SEK/share, valuations have become stretched and my position seems to have reached most of its potential. There is a 5-7% growth potential from here, which with efficiencies translates into a 8-11% annualized upsides from a premium.
- This is a "BUY", but a quite weak one, all things considered.
Remember, I'm all about:
- Buying undervalued - even if that undervaluation is slight and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
- If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
- If the company doesn't go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
- I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.
Assa Abloy is not "cheap" here, but it still does have an upside - so I'll say "BUY".
For further details see:
Assa Abloy: Great Q4 2022 Forms The Thesis For 2023