Jefferies upgrades Assa Abloy to “buy,” citing recovery signs and valuation

Jefferies upgraded Assa Abloy to "buy" with a price target of SEK375, citing early cyclical recovery signs across key regions like the Nordics and U.S. residential, and an undervalued share price. The firm anticipates margin resilience driven by Assa Abloy's aftermarket business and supply chain repositioning away from China, projecting EBIT margins ahead of consensus for Q2 2024 and fiscal years 2025-2026; continued M&A activity and a potential divestiture of its Pfister plumbing unit further support the positive outlook.

Analysis

Jefferies has upgraded Assa Abloy to 'buy' from 'hold,' increasing its price target to SEK375, which represents a 24% upside from the SEK302.50 prior closing price. This upgrade is founded on early indications of a cyclical recovery, with approximately 30% of Assa Abloy's business, previously down 10% from peak levels, now showing improvement. Key regional recoveries include the Nordics (5% of sales), which are rebounding following six rate cuts, and the U.S. residential market (15% of sales), which is stabilizing with the LIRA index forecasting a 2.5% rise in renovation spending by Q1 2026. Additionally, a Q3 2024 rebound in loading dock orders is anticipated to translate into revenue recovery by Q2 2025, while U.S. nonresidential revenues are projected to grow at a low- to mid-single-digit pace, supported by a 33% year-on-year increase in municipal bond issuance. Assa Abloy's earnings outlook is robust, driven by a resilient margin profile stemming from its aftermarket-heavy model (roughly two-thirds of revenue) and asset-light final assembly operations; Jefferies projects Q2 EBIT margin at 16%, 40 basis points above consensus, with 2025 and 2026 EBIT margins also forecasted above consensus at 16.2% and 16.8%, respectively. The company is strategically repositioning its supply chain, moving 10% of its U.S. cost of goods sold sourcing from China to Southeast Asia, enhancing flexibility over peers like Allegion and supporting margin preservation. Continued M&A activity, which contributed 8% to revenue in each of the past two years and is expected to add over 5% in 2025, along with a potential divestiture of the non-core Pfister plumbing unit (valued at $250-$400 million), further bolsters the positive outlook. Jefferies highlights the stock's valuation at 15x 2025 estimated EBITA, below its historical 14.5x-20x range and at a 15% discount to peers, as indicative of re-rating potential.

Key Decisions for Investors

• Investors should evaluate the 24% upside potential to Jefferies' SEK375 price target, driven by early cyclical recovery signs across key markets, projected margin resilience with EBIT margins expected at 16% for Q2 and 16.2% for 2025, and ongoing M&A contributions.
• Monitor leading indicators such as U.S. residential renovation forecasts (LIRA index projecting a 2.5% rise by Q1 2026), U.S. municipal bond issuance (+33% YoY), and the company's specification writing activity, as these support the positive outlook and revenue stabilization in critical segments.
• Consider the current valuation at 15x 2025 estimated EBITA, a notable discount to historical ranges and peers, and the strategic initiatives like supply chain repositioning to Southeast Asia and the potential $250M-$400M divestiture of the Pfister unit, as key factors for a potential share re-rating.