Summary
- Assa Abloy is a leader in locks and lock-related items.
- The company plans to increase its revenue by 25% and its operating income by 35% by 2026.
- That makes the current valuation slightly easier to accept.
- I'm still on the sidelines but the 2026 guidance implies the current share prices represent a 7% free cash flow yield.
Introduction
Assa Abloy (ASAZF) (ASAZY) is a Swedish company and likely the world's best known manufacturer or locks and locking systems. This doesn't just include 'normal' locks with physical keys and bolts, but also automated doors, electronic locks, locks that can be activated with a magnetic card,… Assa Abloy is the 'lock' company.
Assa Ably has its primary listing on the Stockholm Stock Exchange where it is trading with ASSA-B as its ticker symbol . There are two share classes, ASSA-A and ASSA-B and although both have the same economic rights, the A-shares have 10 voting rights whereas the B-shares only have one vote attached to them. As far as I know, only the B-shares are listed on the exchange (the A shares with the ten votes per share are used by the Latour investment holding to control Assa Abloy) and in this article I will refer to those B-shares whenever applicable. The average daily volume is about 1.4M shares. The current market cap, based on the 1.11B shares outstanding is approximately 280B SEK. I will use the SEK as base currency throughout this article.
Unfortunately the website contains a lot of 'download only' links, but you can find all relevant information and documentation here .
The 2022 results are fine, but not impressive given the company's valuation
Assa's financial results improved on all fronts in 2022. Thanks to a strong final quarter wherein the company posted a total revenue of almost 33B SEK and an operating income of 5.15B SEK, the full year results came in pretty strong. The company reported a total revenue of just under 121B SEK, resulting in a gross income of almost 48B SEK. This means the gross margin remained pretty stable and as the SG&A and R&D expenses increased by a similar percentage, you clearly notice a pretty similar strong increase in the operating income. Assa Abloy reported an operating income of 18.5B SEK in 2022, up from the 14.2B SEK generated in 2021.
It goes without saying this had a very noticeable impact on the bottom line. Assa Abloy's net income in 2022 came in at 13.3B SEK, for an EPS of 11.97 SEK.
As you know, I also like to have a closer look at a company's cash flow results. The cash flow statement below shows Assa Abloy generated about 17.2B SEK in operating cash flow excluding changes in the working capital position. Keep in mind this includes 4.37B SEK in cash taxes paid while only 4.23B SEK were owed, so on a normalized basis, and including the 1.33B SEK in lease payments, the operating cash flow was 16B SEK.
We also see the total capex was just 2B SEK, resulting in a positive free cash flow of approximately 14B SEK. Considering there are just over 1.1B shares outstanding, the free cash flow result per share is approximately 12.6 SEK. Slightly higher than the net income, mainly due to the difference between the depreciation and amortization expenses (4.1B SEK) and the actual capex and lease payments (3.3B SEK).
The recent Capital Markets Day confirmed the ambitious targets for 2026
Considering the share price is trading at around 250 SEK per share, it's hard to get very excited about a stock trading at about 20 times earnings and a free cash flow yield of 5.05%. But despite its status, which already is dominant, Assa Abloy expects to continue to grow at a double digit percentage in the next few years. The company hosted a Capital Markets Day in November where it posted an updated mid-term guidance for the 2023-2026 period.
Assa plans to increase its revenue to 150B SEK in 2026 and this should actually go hand in hand with higher margins as the operating income should increase to 25B SEK.
I think that's a pretty realistic target considering Assa Abloy already generated 120B SEK in revenue and 18.5B SEK in operating income. What's interesting is that the 30B SEK in additional revenue should result in a 6.5B SEK increase in the operating income which means the margins will have to expand to reach that result.
And that would make Assa Abloy pretty interesting. Assuming a stable interest expense of around 1B SEK per year and assuming an average tax rate of 25%, 25B SEK in operating income basically implies a net income of 18B SEK, for an EPS of 16.2 SEK. The stock is still trading at a multiple of about 15 times that result. The free cash flow result per share would come in at around 17-17.5 SEK per share for a free cash flow yield of 7%.
Investment thesis
Assa Abloy currently isn't cheap. And even if the company meets its 2026 guidance, it still can't be called cheap and that means the real question is whether or not Assa Abloy's position on its core markets is strong enough to warrant that valuation. I'm leaning towards answering that question with a 'yes' but it doesn't mean I will be buying the stock at the current share price.
I like Assa Abloy as a company. But I'd prefer to try to pick up stock in the low-200 SEK range as I like to have an additional margin of error. I currently have no position in this Swedish company.
For further details see:
Assa Abloy: Quality Comes With A Price