6 July 2012 Fundamental Equity Analysis of Assa Abloy AB ... Assa Abloy (Assa) is a Swedish company

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Transcript of 6 July 2012 Fundamental Equity Analysis of Assa Abloy AB ... Assa Abloy (Assa) is a Swedish company

  • 6 July 2012 Fundamental Equity Analysis of Assa Abloy AB

    Yordanov, Independent Equity Research 1

    Preface

    This independent equity research is a sample that support my equity analytical skills and therefore is a for a

    widely-based usage. I claim no rights on this analysis. The company has been chosen due to its high-quality

    reporting standards and the simplicity of its business model. Those two factors enforce my in-depth

    understanding of the business and therefore enhance my visibility over the long-run.

    I have noted in advance where I have used excerpts of information. The reason behind is not to omit an

    important information that might be vital for a decision-making. Also parts of some sections (especially one

    for competition and markets) are based predominantly on Assa Abloy’s annual reports and their opinion

    about the market and competitive environment. This must be taken into consideration, since using

    predominantly one source of information might be misleading. It is important to remark that I have used

    neither sell side equity reports, nor special (subscription based) industry analyses. In this respect, the

    analysis can be significantly improved (or spoiled) having those two in hand.

    This fundamental analysis is not suitable for short-term investing decisions. You will find no added-value if

    you are such an investor. This analysis is only suitable for long-term investors who base their decisions on

    fundamentals, not technical analysis.

    Krasimir Yuriev Yordanov

    Independent Equity Analyst

    Date: 11.08.2012

    “You have made quite a report. It looks like you've put in a lot of time and have come up with a

    detailed analysis”.

    Michiel Bootsma, Senior Investment Manager at ING IM

  • 6 July 2012 Fundamental Equity Analysis of Assa Abloy AB

    Yordanov, Independent Equity Research 2

    Fundamental Equity Analysis of Assa Abloy AB

    Content

    Page

    1. Summary

    3

    2. Company’s Snapshot – Key Ratios 4

    3. Strategy 5

    4. Market Presence 5

    5. Value chain 11

    6. Products 14

    7. Cost-efficiency 17

    8. Competition 20

    9. Significant risks 24

    10. Management 32

    11. Shareholders

    37

    12. Additional Financial Data 43

    13. Recommendation

    50

    14. Bibliography 51

    15. My Investment Principles 51

  • 6 July 2012 Fundamental Equity Analysis of Assa Abloy AB

    Yordanov, Independent Equity Research 3

    1. Summary

    Assa Abloy (Assa) is a Swedish company operating in the security business that produces opening door

    solutions. It’s market capitalization is currently around SEK 77,8 billion. Its business model is simple, in a

    way that the company does not diversify horizontally. Assa Abloy is strictly focused only on products

    needed to open, manage, and close doors and entrances. From another hand, the Group is geographically

    diversified around the globe, giving Assa a competitive edge in terms of market presence and reach to

    emerging markets. Along with that, part of Group’s strategy is also product leadership. There is a major

    industry shift from mechanical to electromechanical and hi-tech opening door solutions, where Assa Abloy

    seems to lead the pace. The company is strongly exposed to those fast-growing segments, giving it once

    again a competitive advantage.

    Assa Abloy sells through complex distribution channels aiming to reach its end-users, mainly commercial

    and residential customers. The nature of their business and variety of end-users require opening door

    companies to be very active in their relationships with the middle-men.

    Growth is achieved by combination of organic development and acquisitions which have accelerated in the

    past few years. Therefore, continues restructuring is needed to lower the cost of production and to achieve

    synergy effects within the Group. Cost-efficiency is the third pillar of their corporate strategy and the one of

    much attention. Assa Abloy CEO, Johan Molin, has done a good job in positioning the company at good

    place for further development, but COGS are difficult to manage. Company’s profitability has not changed

    significantly since he took place in 2006, but Johan Molin is the one responsible for accelerating sales

    through good products positioned on the right markets. One of the biggest risks for the company is losing its

    current CEO.

    Competition. World’s security market is very fragmented. Opening door solution providers operate mostly

    on their domestic markets, but Assa Abloy along with 4 major of its competitors, is well geographically

    diversified. In terms of reach to emerging markets Assa seems to hold the leadership.

    Company’s shareholding structure is well diversified. Largest shareholders have always been strategic one,

    whereas big part of company structure is in hand of small shareholders. It is meaningful to note there are no

    large investment banks with major stakes into the company, which might mean two things: 1) either they

    don’t even follow the company (and therefore could be misprices), or 2) they simply consider it as an

    overpriced investment. Both ways are important to be revealed.

    Assa Abloy operates in a market that is strongly independenet from government regulations. In my view,

    that significantly decreases the uncertainty and enhances visibility.

  • 6 July 2012 Fundamental Equity Analysis of Assa Abloy AB

    Yordanov, Independent Equity Research 4

    In conclusion, the company is well-positioned for further growth but it reveals signs of overpricing. Its

    valuation multiples are high which might shows the market has already recognized Assa Abloy’s growth

    potential. Moreover, the acquisitions acceleration suggests that sustaining the same high growth rates in the

    future might be challenging.

    2. Company’s Snapshot – Key Ratios

    Source: Own estimations, Assa Abloy

    Source: Own estimations, Assa Abloy

    Source: Own estimations, Assa Abloy

  • 6 July 2012 Fundamental Equity Analysis of Assa Abloy AB

    Yordanov, Independent Equity Research 5

    3. Strategy

    Assa Abloy’s strategy is continuously adapting. Since the new CEO took place in late 2005 the Group made

    its strategy more distinctive. Even though the company had responded to the crisis very well with an actual

    no sales decline, the management came up with a new strategic plan in 2009. Company’s strategy is divided

    into 3 core pillars: market presence, product leadership and cost-efficiency.

    Source: Assa Abloy, Annual Report 2011, page 37

  • 6 July 2012 Fundamental Equity Analysis of Assa Abloy AB

    Yordanov, Independent Equity Research 6

    4. Market presence

    4.1 Security Market

    Assa Abloy estimates total security market to be worth over EUR 250 billion. The segment in which the

    Group is active accounts for around 15 percent of the total market. Moreover, the company estimates their

    market share of 10 percent of that segment in which they are positioned. Assa Abloy (AssaAbloy)

    represents their opinion about the industry this way:

    “Globally, the lock market is still fragmented. However, the market in each country is relatively

    consolidated, as companies in the industrialized world are generally still family-owned and leaders on their

    home markets. They are often well-established and have strong ties with local distributors. In less developed

    countries, however, established lock standards and brands are less common.” (15)

    Source: Assa Abloy, Annual report 2011, page 14

    My calculation shows that their estimations about the market size and

    shares differ slightly but I can assume those approximations to be

    reliable.

    Source: Own estimates

    4.2 Assa Abloy market position

    Company’s strategy aims focusing on profitable commercial segment with high proportion of aftermarket

    sales and increased share of fast-growing electromechanical products. Emerging markets are expected to

    continue growing significantly faster than mature markets in a foreseeable future, and therefore remain

    company’s main focus.

  • 6 July 2012 Fundamental Equity Analysis of Assa Abloy AB

    Yordanov, Independent Equity Research