(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 deleveraging.
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, 2012