Smart Locks And Tactical Focus Propel Future Profitability In A Challenging Landscape

Key Takeaways

• Strong growth strategy through acquisitions and launch of high-tech products posits increased revenue and potential earnings growth by expanding product offerings.
  
• Divestment and strategic focus on core operations aim to enhance net margins by reallocating resources to higher-margin businesses.
  
• Assa Abloy's growth faces challenges from weak residential markets, geopolitical risks, unfavorable currency trends, and potentially dilutive acquisitions impacting profitability and revenue projections.

Catalysts

Provides door opening and access products, solutions, and services for the institutional, commercial, and residential markets in Europe, the Middle East, India, Africa, North and South America, Asia, and Oceania.

• The company has demonstrated strong growth through acquisitions, with 7 acquisitions completed in Q3 and 18 in the first 9 months of the year, which is expected to enhance revenue through expanded product offerings and market reach. This could lead to higher earnings as these acquired companies are integrated and synergies realized.
  
• The divestment of the Citizen ID business, expected to close in Q1 next year, will allow the company to focus on its core operations and could improve net margins by eliminating a less profitable segment and reallocating resources to higher-margin businesses.
  
• The launch of new products like the Kwikset UNITE mobile-enabled wireless smart lock for multifamily properties is anticipated to drive future revenue growth, especially in the growing electronic and smart lock markets, potentially improving net margins as these high-tech products often carry higher margins.
  
• The company’s ability to navigate challenging market conditions and maintain high EBITA margins, such as the record high of 17.7% reported, suggests strong operational efficiency, which could allow for maximized earnings even as market conditions fluctuate.
  
• Expectations of declining interest rates in North America and Europe could boost future residential market activity, especially the R&R segment, potentially leading to increased revenue growth in these key regions.

ASSA ABLOY Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ASSA ABLOY's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.4% today to 11.3% in 3 years time.
• Analysts expect earnings to reach SEK 20.1 billion (and earnings per share of SEK 18.12) by about November 2027, up from SEK 15.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.6x on those 2027 earnings, down from 24.5x today. This future PE is about the same as the current PE for the GB Building industry at 22.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.19%, as per the Simply Wall St company report.

ASSA ABLOY Future Earnings Per Share Growth

Risks

• The residential market remains challenged in North America, Europe, and Oceania, which could impact Assa Abloy's revenue growth and net margins if recovery is delayed or nonexistent.
  
• Deterioration in market conditions in Greater China and Southeast Asia presents significant risks to revenue from these regions, potentially impacting the overall earnings negatively if these markets don’t recover soon.
  
• Recent acquisitions, such as SKIDATA and Level Lock, are expected to be dilutive to earnings per share initially, suggesting a potential risk to net margins and overall profitability as integration costs are managed.
  
• Fluctuating exchange rates, particularly the SEK vs USD, have negatively impacted currency-adjusted sales growth, which could continue to affect revenues if such currency trends persist.
  
• Political risks and uncertainty in macroeconomic conditions, including interest rate directions and geopolitical conflicts, add a layer of uncertainty to Assa Abloy's revenue projections and profitability.

Valuation

• The analysts have a consensus price target of SEK 342.7 for ASSA ABLOY based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK 403.0, and the most bearish reporting a price target of just SEK 284.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SEK 178.8 billion, earnings will come to SEK 20.1 billion, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of SEK 337.7, the analyst's price target of SEK 342.7 is 1.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.