Assa Abloy Earnings: 7% Fair Value Increase on Strong Execution of Acquisition Pipeline Year to Date
Organic growth eased for wide-moat Assa Abloy ASSA B in the second quarter to 3%—from an elevated 8% in the first three months of 2023—aligning with our full-year expectations for more normalized locking system demand in 2023 after an exceptionally strong showing in 2022. Nonetheless, Assa Abloy’s hastened pace of bolt-on merger and acquisition activity year to date leads us to raise our fair value estimate by 7% to SEK 320. A time value of money adjustment also contributes to the fair value estimate uplift. We increase our full-year EBIT and EPS estimates by a respective 10% and 7%—to SEK 21.3 billion and SEK 10.9—with bolt-on acquisitions adding handsomely to 2023 earnings. Assa Abloy shares screen attractively, trading at an almost 20% discount to our revised fair value estimate.
Indeed, 2023 is shaping up as a bumper year for acquisitive growth for Assa Abloy, adding an estimated 11% top-line growth in 2023 versus a more typical 2%-3% long-term average. It has closed eight bolt-on M&A transactions year to date—including the much-anticipated Spectrum Brands hardware and home improvement division deal—adding annualized sales of SEK 17 billion to the Assa Abloy group, thereby accelerating earnings growth. We anticipate a 5-year EBIT CAGR of about 9%, up from a prior 7%, as acquisitive growth augments anticipated organic growth from improving electromechanical adoption rates—which should drive organic revenue growth of about 5% annually—and EBIT margin expansion. We continue to forecast a 16% EBIT margin at midcycle with Assa Abloy to benefit from operating leverage and the realization of cost synergies in its entrance systems division.
Notably, Assa Abloy closed the previously announced USD 4.3 billion acquisition of the hardware and home improvement division in late June 2023.
Correction: July 20, 2023: An earlier version of this note incorrectly said Assa Abloy shares trade at an almost 25% discount to our revised fair value estimate. We’ve amended this to 20%.
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