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

Market News

Gold has risen to $2,475 an ounce, a record high, as markets continue to expect major dovish turns by central banks this year, lowering the opportunity cost to hold non-interest-bearing bullion assets. US 10-year Treasury yield hovers near 4-month low of 4.18%.

US equity markets advanced to fresh highs last night – S&P 500 (0.6%), Nasdaq (+0.2%) – as traders adjust portfolios amid bets the Federal Reserve will soon start cutting interest rates. Wall Street extended a pattern of money rotating into small caps and out of the mega-cap stocks since last week’s soft inflation data. Over the past four sessions, the Russell 2000 has beaten the Nasdaq 100 by almost 12 percentage points — a feat not seen since 2011.

This morning in Asia, markets were mixed – Nikkei 225 (-0.4%); Hang Seng (+0.1%); Shanghai Composite (-0.3%) – as the US warned allies of stricter trade rules in the crackdown on China. Trump questioned whether the US has a duty to defend Taiwan. The Asia Pacific Semiconductor Index fell by 2.4%.

The FTSE 100 is currently 0.1% lower at 8,154, while Sterling buys $1.3010 and €1.1915. UK consumer prices rose by 2.0% in June, slightly above the 1.9% forecast, Core CPI rose by 3.5%, with Services CPI unchanged at 5.7%. Traders pared bets on a Bank of England rate cut in August to 25% and looked to the King’s speech today at 11.30 this morning.

The oil price continued its recent pullback, with Brent Crude currently trading at $83.40 a barrel.

Amazon’s Prime Day sales climbed almost 12% in the first seven hours of the event compared with the same period a year earlier.

Source: Bloomberg

Company News

Assa Abloy has today announced Q2 2024 results which were slightly below market expectations. However, on the analysts’ call the company was fairly upbeat about the outlook for the second half and highlighted that the large HHI acquisition continues to perform well. In response, the shares are 1% higher in early trading.

Assa Abloy is the global leader in access solutions to physical and digital places, with a portfolio of well-known global and local brands, such as Yale, Union, HID, 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 safety and 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 actively upgrade the installed base, generate more recurring revenue, increase service penetration, and expand exposure to emerging markets. The group is on track to exceed its target to generate SEK 25bn of profit from SEK 150bn of sales by 2026, with new 2028 targets – SEK 35bn of profit from SEK 220bn of sales – outlined at the last Investor Day.

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 to recoup the elevated raw material cost increases experienced over the last couple of years. 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 the three months to 30 June 2024, the market environment remained challenging. Net sales rose 10% to SEK 38.0bn, a touch below the SEK 38.4bn forecast. In organic terms, which strips out the impact of acquisitions & disposals (+11%) and currency (zero), sales were down 1%, just below the consensus expectation for a flat result. Price growth of 2% was offset by a 3% volume decline.

By business division, organic sales growth of 3% was generated in the Americas driven by continued solid non-residential development in the US. Residential remains mixed, with new build growing and remove & replace declining. EMEIA rose by 1%, driven by strength in Central Europe. Entrance Systems (a separate division) was flat, with much lower demand for loading docks in the US offset by strong growth in Pedestrian. Asia Pacific fell by 5% mainly because of continued low construction activity in China. Global Technologies (also a separate division) declined by 7% as a result of high comparable sales figures last year due to the backlog catchup in Physical Access Control.

Operating income increased by 11% to SEK 6.1bn, in line with the market forecast, and the operating margin was stable at 16.0%. The adjusted run-date margin is 16.6%. Strong operational execution with cost savings of SEK 180m, continued strong price realisation, lower direct material costs, and the HHI acquisition all contributed to performance. EPS rose by 5% to SEK 3.54, a touch light of the SEK 3.60 expected.

Operating cash flow fell by 16% to SEK 5.6bn, with strong cash conversion rate at 107%. The group’s financial position remains robust, with net debt to EBITDA fairly stable at 2.4x since the start of the year. Looking forward, gearing is expected to fall rapidly thanks to strong free cash flow generation. In 2023, the group declared a larger dividend than expected – up 12.5% to SEK 5.4, equal to a yield of 1.7%.

M&A will continue to be a core driver of growth, with over 900 potential acquisition targets identified globally. The focus is on acquiring new customers in the core business, extending the core offering, access new technologies to deepen the group’s competitive position, and increased service capacity.

In 2023, the group acquired the HHI division of Spectrum Brands for $4.3bn to fill a strategic gap in its US residential business. The unit is performing well, with integration proceeding to plan and the company is even more confident than a year ago that it will be able to realise the five-year synergy target of $100m. On a standalone basis in the quarter, HHI delivered a high-single digit sales growth with a sequentially improved operating margin.

Elsewhere, M&A activity remained buoyant with eight deals completed in the second quarter with combined annual sales of about SEK 1bn. The pipeline remains strong, and the group still plans to make its usual 15-20 acquisitions per year. In June, Assa acquired Wesko Locks, a Canadian manufacturer and supplier of electronic and specialty locks.

Assa Abloy doesn’t usually provide guidance but highlighted on the call that July has been flat. They also said they expect a return to organic growth in the second half of 2024.

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 Covid-19 pandemic, its decentralised operational model and agile cost base provided flexibility. To further optimise its operational footprint, the group has started to work on its next manufacturing footprint program, with a launch expected at 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