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Morningstar | Assa Abloy Stands to Benefit From the Ongoing Shift to Electrical and Automated Locks

Assa Abloy has significant growth potential as it benefits from structural changes. There are two key drivers of future growth. First, we expect an industrywide shift toward software-driven products, expanding functionality and linking locking systems with other building systems. Second, emerging-market demand will move up the quality curve to more sophisticated locking solutions, in which Assa Abloy is a leader. If the spectrum of today’s locks were defined by a basic mechanical lock on one end and a software-controlled locking system on the other end, Assa Abloy’s product portfolio would be heavily weighted toward the latter. Advances in the past decade have expanded the functionality of lock systems to enable ever more precise access parameters, as well as enhanced identification of lock system users. For example, a building administrator would be able to provide a registered visitor with temporary access to a computer for a specified two-hour window on a particular day. Technological improvements are shortening the upgrade cycle for locks, as customers are eager to implement new security-enhancing features. We expect the shift toward increasingly software-driven locks will continue over the long term, with the company’s global technologies division forging the path. The division is experiencing good initial success in selling virtual keys, typically issued on a temporary basis to mobile phones.Asia and other emerging markets lag in locking solutions, with underpenetration of electromechanical locks, such as those linked to a keycard reader. Pent-up demand in the region, combined with strategic acquisitions, fuelled a fivefold increase in Assa Abloy’s Asia-Pacific revenue over the past decade, with organic revenue growth averaging 5% from 2005 to 2013 (before China’s property bust). For buildings with multiple daily users, there are obvious benefits from upgrading to more-sophisticated systems that can track and limit building access. We think Asia and other emerging markets offer a long runway of demand for Assa Abloy's products.