Morning Note: Market news and an update from Assa Abloy.

Market News

US equity markets were little changed last night – S&P 500 (+0.2%), Nasdaq (+0.1%) – after a slew of cautious remarks from Federal Reserve officials. The dollar and Treasuries steadied – the 10-year currently yields 4.09%.

This morning in Asia, shares in Hong Kong dipped (-0.3) while those on the mainland whipsawed before moving higher again (Shanghai Composite, +1.4%), pointing to doubts over the potency of Beijing’s measures to stabilise the market. Volatility is likely as Chinese markets are closed for a weeklong Lunar New Year holiday starting Friday.

The FTSE 100 is currently little changed at 7,678. More than half of UK CEOs expect to make a major acquisition in the next three years, a PwC survey of 300 bosses showed. Cheap valuations may encourage takeover activity, with the MSCI UK index’s EBITDA multiple — a metric used to value M&A targets — showing a 48% discount to the US. This has widened from 15% in 2015. As if by magic, housebuilder Barratt Developments has this morning made a recommended all share offer for Redrow. Under the terms of the deal, Redrow shareholders will receive 1.44 new Barratt shares, which based on last night’s closing price represents a premium of 27.2%. Redrow shareholders will hold 32.8% of the enlarged group. Barratt is down 7% in early trading.

Gold ($2,033 an ounce) has never been more expensive heading into the Lunar New Year, but Chinese consumers are still buying the precious metal as prices for stocks and property sag. Brent edged up to $78.90 a barrel. Sterling trades at $1.2624 and €1.1727.

Donald Trump is targetting the EU for a potential slew of punitive trade measures designed to address long-standing grievances, people familiar said. Among actions in play if he retakes office: tariff hikes and countermeasures on European digital services taxes.

Source: Bloomberg

Company News

Assa Abloy has today announced 2023 full-year results that were a touch below market expectations. However, the group raised its dividend by more than forecast. Ahead of the analysts’ call, the shares are down 2%.

Assa Abloy is the global leader in access solutions, with a portfolio of well-known global and local brands, such as Yale, Union, and Lockwood. Products include doors, sensors, locks, alarms, fencing, gates, and identity systems. The key long-term drivers of the industry are increased demand for security; growing urbanisation; increased emerging market wealth; the shift to new digital and electronic technologies; the development of sustainable buildings to meet climate change objectives; and changing market regulations. Furthermore, one of the legacies of the pandemic is likely to be a shift towards touchless (hygienic) activation points, automated doors, and location services, which also provide recurring revenue from licenses and software. As the brand leader in most markets, with a large installed base and strong distribution channels, we believe Assa Abloy is well placed to take advantage of these trends.

The long-term financial target is to generate annual sales growth of 10%, half organically and half from acquisitions, and to earn an operating margin of 16%-17% over the business cycle. The aim is to generate SEK 25bn of profit from SEK 150bn of sales by 2026. The group has previously said it needs to generate organic top-line growth of 3% to offset inflation and drive the margin forward, although clearly more was needed more recently to recoup more elevated raw material cost increases. The group has a strong track record of innovation and aims to generate 25% of sales from products launched in the last three years.

A ninth Manufacturing Footprint Program (MFP9) is currently underway to further increase efficiency and optimise operations. The target savings are SEK 0.8bn (4% of operating profit).

In 2023, net sales rose 16% to SEK 141bn. In organic terms, which strips out the impact of acquisitions & disposals (+8%) and currency (+5%), sales were up 3%. Electromechanic and electronic locks grew by 10% and now account for 30% of sales.

During the final quarter, net sales rose 12% to SEK 37.0bn, pretty much in line with the market forecast of SEK 37.2bn. In organic terms, sales were up 0.4%, with growth made up of a 2% volume decline and 2% price growth as the group continued to recoup higher material costs.

By business division, in the final quarter, Americas growth (+5%) was primarily driven by continued good demand within the US non-residential business. Entrance Systems (+3%) had strong growth in all business areas except for the Residential segment. Asia Pacific fell by 1% as lower intra-group sales and weak export business continued to affect the region. EMEIA’s 2% decline was driven by weakness in the Nordics again this quarter. Global Technologies (-7%) had very high comparable sales figures last year mainly due to catching up with the backlog in PACS.

For the full year, operating income grew by 20% to SEK 22.1bn, with the adjusted operating margin rising from 15.3% to 15.8%. In Q4, operating income increased by 11% to SEK 5.72bn, versus the market forecast of SEK 5.77bn, and the operating margin was 15.5%. Excluding the acquisition of HHI and divestment of Emtek (see below), and despite lower volume, the margin was 16.8% and within the group’s target range. The operating leverage of the business was strong, driven by lower direct material costs, cost-savings, and price realisation. The group’s restructuring programs proceeded according to plan, with SEK 0.5bn of cost savings in the quarter. EPS rose by 13% to SEK 13.54 in the full year, and by 6% to SEK 3.56 in the final quarter (vs. SEK 3.42 expected)

Operating cash flow grew by 60% in the year to SEK 25.2bn, with the cash conversion rate at 128%. The group’s financial position remains robust, although net debt to EBITDA rose from 1.4x to 2.3x following the completion of the HHI deal (see below). Looking forward, gearing is expected to fall rapidly thanks to strong free cash flow generation. The group has declared a larger dividend than expected – up 12.5% for the full year to SEK 5.4, and equal to a yield of 2%.

During the year, the group completed the $4.3bn acquisition of the HHI division of Spectrum Brands. As part of the regulatory process, Assa Abloy agreed to sell assets in North America for $800m. The company believes HHI is a good strategic fit – it fills a gap in its US residential business – and has said the business is performing in line with expectations. The integration process is ongoing as the group starts to realise synergies of around $100m within a five-year period.

Elsewhere, M&A activity remained buoyant with six deals signed in the final quarter with combined annual sales of SEK 900m. The pipeline remains strong, and the group still plans to make its usual 15-20 acquisitions per year. Last month, Assa acquired Integrated Warehouse Solutions, a US manufacturer of loading dock equipment. The company generates sales of $170m and adds complementary products and solutions to the group’s core business. The acquisition will be accretive to EPS from the start.

The group is also selling non-core assets. Mostly recently, its elevator maintenance business PACA ascenseur was offloaded. This business was part of the acquisition of agta record in 2020 and its sale will have a positive impact on the group’s margin.

Assa Abloy doesn’t usually provide guidance. The company points out that the macroeconomic environment remains uncertain, and management is dedicated to mitigating any impact from potentially negative changes in demand, through local agility and focus on cost-control. Assa has previously said that during both the global financial crisis in 2008/09 and the pandemic, its decentralised operational model and agile cost base provided flexibility. To further optimise its operational footprint, the group has today announced it has also started to work on its next manufacturing footprint program, with a launch target towards the end of 2024. In addition, the group’s large exposure to after-market service and its structural pricing power leaves the business better positioned to navigate through these uncertain times.

Source: Bloomberg