Morningstar | First-Quarter Demand Was Strong for Assa Abloy; Margins Under Modest Pressure, Shares Fairly Valued
Demand for wide moat lock and door supplier Assa Abloy's products continued to be strong in the first quarter of 2019, but margins are still under moderate pressure, mirroring the 2018 results. Group organic revenue grew by 5% while reported revenue was up 16% with a mix of acquisitions and currency flattering growth. The EBIT margin contracted by 20 basis points to 15.1%, with currency, raw material price pressure, and acquisitions all contributing. Reported EBIT grew by 15%, and the group return on capital employed was up 70 basis points year over year to 14.9%, well above cost of capital. We are maintaining our SEK 173 fair value estimate.Regionally, the higher return regions are growing at a faster clip than the low margin Asia region, where China has been a challenge in the past due to, among other things, customer price sensitivity. The Americas grew revenue by 10% organically, and the EBIT margin expanded by 20 basis points to boost reported EBIT by 23% year over year. That's pleasing to see given the high returns (21.5%) on capital employed in this region. It benefits from good demand on premium products such as those with software and electrical components, in contrast to a pure mechanical lock.
Organic revenue growth in Asia was decent at 6% but the already low EBIT margin contracted by 270 basis points to 5.2%. EBIT declined by 23% year over year, the return on capital employed improved to 5.5%.
The company's largest division, Entrance systems, built up largely through acquisitions, posted solid organic revenue growth of 3%, but had a slight EBIT margin contraction to 13.2%. Returns in the business are in line with the group at around 14% but have the potential to expand, as most of the acquisitions are small businesses that can expand margins by leveraging Assa Abloy's larger scale and wider distribution channel. For the time being, however, the company's strategy of ongoing acquisitions will mute this benefit.
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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