Morningstar | Assa Abloy's 3Q: Europe Is Slowing, but Modern Locking Solutions Can Absorb Some of the Slowdown
Our key takeaways from wide-moat Assa Abloy's third-quarter results include the following: 1) demand for modern locks such as digital locks and electromechanical locks remains strong; 2) raw material prices continue to pester margins but could be offset by first-quarter 2019; and 3) Europe's construction demand is showing signs of returning to midcycle levels. For the first nine months of 2018, 9% revenue growth, including acquisitions, is tracking slightly higher than our full-year forecasts, while the 15.7% EBIT margin is a little weaker. On balance, we see no reason to change our SEK 173 fair value estimate. We see shares as fairly valued at current levels.Group organic revenue grew 5% in the first nine months of 2018, above last year. The strongest demand came from modern locks, such as electromechanical and digital locks, which fed growth in the Americas and in global technologies, posting 7% and 8% organic sales growth, respectively. These products still have a long runway of growth, helping to smooth some of the cyclicality in revenue.
EMEA organic revenue growth has slowed in 2018, as construction demand has cooled off in some EMEA markets in the past few months. Year-to-date organic revenue growth is at 2%, or half the rate of last year. However, construction has been in an upcycle for the past couple of years, particularly in North America and Europe, with benefits to robust top-line growth for construction-sensitive names like Assa Abloy, Legrand, and Geberit. However, for Assa Abloy, 2% growth is closer to midcycle levels, and we do not see this slowdown as a warning sign on long-term business.
With lower volume and higher raw material prices, a source of pain for most European capital goods companies, the company's EMEA 2018 EBIT margin is tracking 60 basis points below the 2017 level. Raw material price pressures affect other divisions too and contributed to a group-level 30-basis-point EBIT decline year over year for the first nine months.
ASSA ABLOY provides a range of door opening solutions. Co. is organized into five divisions. Europe, Middle East and Africa division, Americas (North and South America) division and Asia Pacific (Asia, Australia and New Zealand) division manufacture and sell mechanical and electromechanical locks, security doors and hardware in their respective geographical markets. Global Technologies division operates worldwide in the product areas of access control systems, secure card issuance, identification technology and hotel locks. Entrance Systems division is a global supplier of entrance automation products and service.
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