(The following statement was released by the rating agency)
Nov 19 -
Summary analysis -- Assa Abloy AB --------------------------------- 19-Nov-2012
CREDIT RATING: A-/Stable/A-2 Country: Sweden
Primary SIC: Security systems
Mult. CUSIP6: 045387
Credit Rating History:
Local currency Foreign currency
21-Sep-2001 A-/A-2 A-/A-2
The ratings on Sweden-based lock manufacturer Assa Abloy AB reflect our view
of the group's strong position in the moderately cyclical lock and door
markets, highly diverse customer base in mature and growth markets, and its
innovative product portfolio--all of which support the company's strong and
stable operating performance and cash flow generation. We consider these
positive factors to be mitigated by the company's aggressive acquisition-led
growth policy and historically high dividend payouts, which have resulted in
weak debt-protection measures for the ratings. We also believe the positive
factors are to some extent offset by the company's exposure to increasing
competition in some growth markets.
S&P base-case operating scenario
We anticipate that Assa Abloy will achieve 5%-10% 2012 growth, including
acquisitions, on the back of a slowing macroeconomic environment, particularly
in Europe, and due to the general weakness in the global construction sector,
which is closely related to the company's operations. However, because about
two-thirds of sales are recurrent and stem from lock and security door
replacements, and because 75% of end customers and users are either
professional or institutional as opposed to consumer or residential, we
consider Assa Abloy to be one of the better-equipped companies to handle an
economic downturn, which we believe to be highly likely in 2013. This compares
favorably with other capital goods peers, which have a much lower share of
aftermarket sales or are more directly exposed to economic swings, for example
in consumer confidence. In addition, Assa Abloy will most likely add to its
top line through acquisitions, which is one of its core strategies.
Owing to the group's stable sales, strong market position and pricing power,
and continuous cost cutting, we anticipate an EBITDA margin of 18%-19% in 2012
compared with 18.4% 2011 and 19.2% in 2010.
Assa Abloy has historically generated an EBITDA margin of 18%-20%, independent
of swings in the economic cycle because of its strong market position, good
pricing power, high degree of aftermarket sales, and good cost control. As an
example, the large acquisition of Swedish peer Cardo at the start of 2011 did
not harm Assa Abloy's margins, as we had previously forecast.
S&P base-case cash flow and capital structure scenario
Under our base-case scenario, we forecast that Assa Abloy will generate free
operating cash flow (FOCF) of slightly more than Swedish krona (SEK)4 billion
(about EUR470 million) in 2012. This compares with SEK4.5 for the rolling 12
months to Sept. 30, 2012, and SEK4.1 billion in 2011. Our estimate of FOCF
reflects our view that the group will continue to achieve stable sales and
operating margins with low capital expenditures.
We believe funds from operations (FFO) to debt will reach slightly more than
30% and FOCF to debt more than 20% in 2012, in line with Assa Abloy's
historical performance. The group has a publicly stated acquisition target of
adding about 5% of revenues to its top line over a business cycle. When
incorporating SEK3 billion of annual acquisition spending into our ratings and
assumptions, discretionary cash flow is still positive. We do not anticipate
further acquisitions of a size similar to Cardo in the short term.
The short-term rating on Assa Abloy is 'A-2', reflecting our view of the
company's overall liquidity as "adequate." As of Sept. 30, 2012, liquidity
sources consisted of:
-- Cash and liquid assets of SEK971million (about EUR148 million), SEK321
million of which we consider to be excess cash;
-- A fully undrawn EUR1.1 billion (SEK9.4 billion) committed syndicated
credit facility maturing in 2014, with no financial covenants or material
adverse change clause; and
-- Robust FOCF-generating capacity (about SEK4.9 billion in 2010 and SEK
4.1 billion in 2011), which we anticipate will be more than SEK4 billion per
year over the medium term under our base-case scenario.
This compares with the following near-term expected cash calls:
-- Debt maturities of about SEK6.4 billion in the coming 12 months; and
-- Potential acquisition expenditure of SEK2-3 billion yearly from 2012.
The stable outlook reflects our view that Assa Abloy will continue to generate
solid FOCF, offsetting its fairly high debt levels, in the coming two years.
Although we expect 2013 to be a challenging year for most Europe-based
industrial companies, Assa Abloy has a proven track record of stable earnings
and cash flow, and we therefore expect it to manage a potential economic
downturn. We view adjusted funds from operations to debt of about 30%-35% and
positive discretionary cash flow generation as commensurate with our current
rating on Assa Abloy. Under our base case we expect the company to generate
FOCF of SEK4 billion a year, and overall cash flow generation to be sufficient
to compensate for dividend payments and acquisitions.
We would consider lowering the rating if cash flows and credit metrics were to
fall significantly below our base-case expectations. We believe this might
happen in the event of major debt-funded acquisitions. A scenario of
significant organic revenue decline and deterioration in Assa Abloy's gross
margin could also lead us to take a negative rating action. However, we see
this as fairly unlikely under our current economic forecasts.
An upgrade at this stage is unlikely in our view and would require significant
Related Criteria And Research
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,