EUR 850.00 For Business Accounts Only

Morningstar | Assa Abloy 2Q Shows Good Digital Product Growth; Shares Fairly Valued

There were three standout points in Assa Abloy's second-quarter results for us: 1) demand for digital products seems to be outgrowing some of the other products; 2) European growth looks fairly mediocre relative to the group; and 3) the EBIT margin across the divisions seems to be trending slightly lower than in 2017, with the exception of the global technologies divisions. Assa Abloy had already prereleased headline figures and an impairment charge in China, so the group-level numbers were not a surprise. On the whole, including acquisitions, revenue growth looked in line with our forecasts, while the EBIT margin is running at modestly lower rates (roughly 50 basis points), likely due to raw material price increases. We do not expect to make significant changes to our forecasts and are maintaining our SEK 173 fair value estimate and wide moat rating. We see the shares as fairly valued.

Assa Abloy offers the broadest array of products in its Western markets, and in the lineup, digital products seem to be outgrowing others. The global technologies and Americas divisions both benefited from good demand on digital lock solutions, with second-quarter organic revenue growth of 6% and 9%, respectively, outgrowing the group's 5% growth. Revenue in the European division was a modest 2%. The company's August Home smart lock acquisition last year is so far proving to be a much more successful one than some of its Chinese acquisitions, on which the company recently took a significant goodwill write-down.

We suspect that the digital product component is also the reason for the better margins relative to the group posted in the global technologies division, which focuses on digital and software integrated locking solutions, and requires fewer components subject to raw material price movements. Global technologies is the only division to post first-half margin expansion (around 50 basis points) against fiscal 2017, compared with a 50-basis-point contraction for the group.