Assa Abloy – Great Company Might be a Great Investment?

Assa Abloy AB provides secure door opening solutions. It operates in areas such as access control, identification technology, door automation and hotel security.

Swedish Assa merged with Finnish company Abloy in 1994 and a combination of two local industry leaders became an international success story. It’s interesting, how so old and simple invention as a lock can be as a basis of so successful business idea. Company is a global leader in locks and other door opening solutions.

Assa Abloy is without a doubt quality company. It is very profitable and growing. Company’s target is 10 % annual growth through a combination of organic and acquired growth. Lately acquired growth has been the prevailing. During the last 20 years Assa Abloy has acquired over 200 companies all over the world. Almost every month it will purchase a small company from somewhere.

Assa Abloy is really global company. Although the majority of their sales coming from North America and Europe they have a strong position in Asia and Oceania also. Recently North America has been a strong growth area and has left the Europe behind. Many of the emerging markets are stagnating right now, but there are the best growth opportunities for the future.

Measured by any indicators Assa Abloy has been very profitable and strong during the last 10 years. Their sales, revenue, dividends as well as their net income have evolved well. Company’s operating margin target is 16-17 % and it has been over 16 % already couple of years. Balance sheet is strong and debt level is well under the control. Return on equity is nearly 20 % and the firm produces a steadily growing cash flow.

 

Will the growth continue and where you can find its foundation?

Assa Abloy believes that they can still grow strongly because the market has a lot of space. I believe that company is well positioned for continued long-term profitable growth because of two major points.

(1) Growth from emerging market.

During the next ten years one billion people will move from rural to cities. Their income increase and they want to protect their property. Global security demand will continue to grow faster than the global economy. For Assa Abloy this means increased demand for new housing, workplaces and stores. E.g. Assa Abloy can grow in China and India by buying dozens of small local companies.

(2) Growth from technological innovations.

The future of the locking systems is entering the digital age. Demand is increasing sharply for new digital and mobile security technology to access buildings, open doors, access equipment such as computers, verify rights such as citizenship and driving licenses and identify educational and professional competence. Electromechanical products and entrance automation have increased from 27 percent of sales to over 50 percent in ten years. The digitization wave is creating enormous potential for smart security, connected door opening solutions and access management and control in homes and workplaces.

 

Assa Abloy as an investment case

We know that Assa Abloy is quality company and we can suppose it has a good premise to grow profitably also in the future. What should investor think about the company? What kind of return is reasonable to expect? If you bought Assa Abloy B ten years ago paying 48 SEK and its value is now 167 SEK you got a yearly profit of 13.3 % plus dividends – not so bad. But the past is the past and the future success will decide our return. Let’s look at the company’s fundamentals and valuation now:

Stock price: 165.50 SEK

P/E is 23 and during the past 10 years average was 18-19.

EPS TTM – 7.11, 12/2015 – 6.93, 12/2014 – 5.79, 12/2013 – 4.31, 12/2012 – 4.65, 12/2011 – 3.08.

FCF per share TTM – 5.91, 12/2015 – 6.32, 12/2014 – 4.81, 12/2013 – 4.43, 12/2012 – 4.43, 12/2011 – 3 98.

The average EPS growth rate: 14.2 (during the past 3 years), 15.6 (past 5 years), 13.1 (past 10 years).

P/B is 4.1 and during the past 10 years average was about 4.

The average Book Value growth rate: 15.8 (during the past 3 years), 14.5 (past 5 years), 20.5 (past 10 years).

ROE is 18.7 and during the past 10 years average was 20-21.

Dividend yield is 1.6 and payout ratio is 0.37 (during the past 5 years average was 0.36)

Dividends per share 12/2015 – 2.17, 12/2014 – 1.90, 12/2013 – 1.70, 12/2012 – 1.50, 12/2011 – 1.33.

The average Dividend growth rate: 16.0 (during the past 3 years), 14.8 (past 5 years), 9.4 (past 10 years).

Company’s EV/EBIT is 18.5.

 

It’s maybe a little bit too optimistic to expect EPS growth rate to be distinctly over 10 % also during the next 10 years. But then again nothing indicated it to be much lower than  10 %.

During past 5 years Assa Abloy had total earnings of 24.79 per share. Of that 24.79 the company paid out in dividends a total of 8.60 per share. That means retained earnings of 16.19 a share. During the same period Assa Abloy’s per share earnings rose from 3.08 to 6.93 a share. So retained earnings of 16.19 a share produce 3.85 in additional income. This means 23.8 % total return on retained earnings – pretty impressive.

If you buy Assa Abloy when company’s P/E is at an average level of 18-19, It is quite realistic to expect that you will get about the same return as during the past ten years. If you buy it right now when P/E is 23, you may need to compromise somewhat to your return target.

Assa Abloy can also be good play for dividend growth investor. In recent years, dividend growth rate has been over 10 %. And when the dividend payout ratio is something like 0.37 there is a lot of room for dividend growth. Assa Abloy’s dividend policy is following: “The objective of the Board of Directors is that, in the long term, the dividend should be equivalent to 33–50 percent of income after standard tax, but always taking into account Assa Abloy’s long-term financing requirements.” The last phrase is important. We should remember company’s strategy to grow through acquisitions. That requires capital that is out of dividends and I’m pretty sure the company will continue on their path of profitable acquisitions like they have done already many years. Also notice that Assa Abloy pays dividend once a year which is typical in Europe.

Few words about Assa Abloy’s share and ownership structure. The company is headquartered in Sweden and the main listing is at Stockholm Stock Exchange (OSTO:ASSA B). US based investors with no access to the primary listing can acquire shares under the ticker (OTCPK:ASAZY). Assa Abloys’s share capital is distributed among 57,525,969 Series A shares and 1,055,050,365 Series B shares. Each Series A share carries ten votes and each Series B share one vote. Only Series B shares are available for public trading. This is very common in Sweden, but I know that all investors – especially in US – do not love it. One share, one vote is generally recommended structure. Largest voting rights in the company use Investment AB Latour (29.5 %). It is investment company owned by wealthy Swedish family Douglas.

 

Final words

To be honest, for me it wasn’t the easiest task to analyze Assa Abloy. I don’t mean practical work, figures are clear and the business of the company is not the most complex one. What I mean is the deep value investor in me who rebelled against the idea of paying a high value metrics (P/E, PB, EV/EBIT) for anything. It looks like Assa Abloy can never be cheap enough, but maybe you should change your way of thinking. In the case of Assa Abloy company’s intrinsic value turns on its ability to sustain high returns on invested capital and resist reversion to the mean. The company’s economic franchise arises from the position of market leader in a growing market, superior technological know-how and pricing power. There’s a kind of “moat” that protects excellent returns of invested capital.

But Assa Abloy is not a risk-free investment. Any failures by the company’s products could have an immediate impact on their brand names. Also High technology is always vulnerable to new competition. I will follow Assa Abloy closely and I’m ready to invest as soon as the most important value metrics are below average – and all other things being equal.

 

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