Questor: Secure returns with this Swedish home safety company’s growth forecasts

Share tip: an impressive pipeline of projects locks in this business’ bright future

Investors love companies with strong brands because of the prices their products fetch. At the heart of what makes customers willing to pay up is trust that they are buying something of sufficient quality. There are few areas in which trust is more important than securing one’s property.
This is a key attraction of Assa Abloy, a Swedish company that is a global leader in locks and doors. Among its huge stable of home and business security brands are household names such as Yale and Mul-T-Lock, as well as the group’s namesakes and more specialist propositions. Testament to the pricing power this raft of respected names gives the company are its solid operating margins, which have stayed in the range of 14pc to 16pc throughout the last 15 years. 
But the real attraction of this impressive profitability is that as well as being consistent, it has been accompanied by solid growth. Between 2019 and the first quarter of 2024 sales have risen by 53pc, which is equivalent to an average annual compound growth rate of 8.5pc.
The combination of pricing power and growth has made Assa Abloy a firm favourite with many of the world’s best fund managers, whose investments are tracked by financial publisher Citywire. The shares are held by 12 of these investors, each among the top 3pc of over 10,000 global equity fund managers.
Most of these shrewd shareholders specialise in investing in the world’s best quality companies. The level of their backing has secured Assa Abloy Citywire’s top AAA Elite Companies rating.
Management is optimistic that Assa Abloy’s financial future will be even brighter than its recent past. The company has put in place a 10pc target for annual sales growth through the business cycle and expects operating margins to move up to between 16pc and 17pc.
Acquisitions are expected to play an important role in growth. The company has bought more than 350 businesses since it was formed through the merger of Assa and Abloy in 1994. This includes over 100 deals since 2018. Its largest ever acquisition – the $4.3bn (£3.3bn) acquisition of HHI in North America – was completed last year after protracted delays in obtaining competition clearance.
Deals are used by the group to break into new geographies and product areas. As these acquisitions have made the group bigger and more diverse, they have also created opportunities to move into new complementary product areas, thereby increasing the potential for further deals. It currently has a pipeline of over 900 targets.
Services is a business area in which Assa Abloy is particularly keen to expand. Installation, maintenance and repair all look ripe for consolidation given the proliferation of small players.
Importantly, unlike so many deal-hungry companies, Assa Abloy has a record of creating value for shareholders with acquisitions, as well as building scale.
A key benefit of scale for Assa Abloy is that it increases its ability to spend on research and development (R&D) in order to stay ahead of the competition. So while R&D as a percentage of sales has risen over the last decade by about a half – from 2.7pc to 4.1pc – in money terms spending is up nearly four-fold to Skr 5.7bn (£423m).
Much of the R&D, as well as acquisition activity, is focused on high-tech locks that track their own usage and are activated with minimal contact, such as through smartphones. Demand for these products is driving substantial growth at Assa Abloy’s global technology division and building valuable recurring software revenues. These new products are also encouraging existing customers to upgrade locks.
Regulation is another positive influence on long-term growth, as is urbanisation and the group’s exposure to emerging markets, which account for 14pc of sales. In emerging markets, spending per head on locks is less than 5pc of that in Western economies. 
A slowdown in Chinese construction has hurt sales in recent years and marks one reason why shares in Assa Abloy trade at a relatively low multiple of forecast earnings.  This is compared with its recent history of 20 times forecast earnings. That is in the bottom third of the 10-year valuation range – despite the quality of the business and plucky growth and margin targets.
The shares, which are available through most UK brokers, also offer a forecast yield of 1.9pc, although the right paperwork must be completed to minimise dividend withholding tax.
This column views the high-quality growth and decent value on offer from Assa Abloy’s shares as a very attractive combination, as do many of the world’s best fund managers.
Questor says: buy
Ticker: SE:ASSA.B
Share price: Skr 320.20
Algy Hall is editor of Citywire Elite Companies.
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