The Access Solutions is a lagging indicator of tangible CapEx across the globe. Furthermore the valuations of access solutions generally imply macroeconomic tailwinds. It is for those reasons that investors should keep an eye on growth.
It can be difficult as an individual investor to compile and read 9 quarterly reports on growth and either notarize or memorize the global growth pattern across three distinct geographies and different product groups.
For that reason this compilation of global movements exists. Most major access solution companies have been incorporated, but the following information relies heavily on different conference webcasts and a qualitative interpretation of different CEO angles.
Without further ado this article will attempt to explain the global trends in the access solutions over the last 3 quarters across multiple geographies. The key sources are Allegion (NYSE:ALLE), Assa Abloy (ASAZY) , and Dormakaba (OTC:DRRKF). The information is highly relevant for Gunnebo (OTC:GBOGF), Napco (NASDAQ:NSSC), and most companies that rely on institutional CapEx.
Europe: Record Performance with Electromechanical Pulling Through.
Almost all parts of Europe performed extremely well. The performance over the last 6 months has been some of the best in a decade. Across all three major companies the Eastern European segments performed incredibly well. Scandinavia also experienced substantial growth.
While certain projects & individual deals fell through across the spectrum the general organic growth was above 3%. Allegion pulled through with over 6% organic growth across most quarters.
Adoption of technology was the lead story in the European segment with every company reporting increased technology sales. Europe is already one of the primary adopters of electromechanical locks so the continued strength makes NA focused operators (like Allegion) slightly less attractive on a run-rate basis.
Middle East: Oil Recovery Lightens Downturn - Bright Lights on The Horizon
The Middle East has been a fairly slow category since the oil downturn and low comps have competed with even lower comps year-over-year. In the back-half of the last 9 months the growth picked up slightly and several large projects emerged.
Middle-eastern revenue decreased across the board in FY17, but picked up in Q1-18.
While the LSD levels of organic growth can hardly be characterised as a rebound it is clear that 2018 should be a better year than 2017 for the Middle East, especially on an institutional and commercial level.
It could be speculated that the IPO of Aramco will accelerate sales dramatically in the region as proceeds will increase public spending.
South America: A Beginners Rebound
The oil-countries of South America slightly resembled the Middle-East, but in general growth picked up across the region. Assa Abloy reported slight weakness in Brazil at the start of the year due to the multi-year recession.
Brazil has reported decent economic figures in the late end of 2017, but Q1 was another quarter of negative growth in Brazil for Assa Abloy. The rest of the geography showed good growth across all companies.
Asia Pacific: The Differentiating Factor
The entirety of the APAC region showed growth across the operators. Electromechanical and general technology grew double-digits in the region, but results varied across companies. The issues with China continued for Assa Abloy as the accounting irregularity issues and downsizing led to another sluggish quarter. Allegion has a slightly material presence in APAC, but most are concentrated on developed countries such as Australia.
Only Dormakaba really operates extensively in China, but they managed to grow organically in the double-digits. At the same time Allegion seem to (broadly speaking) less enthusiastic about their Chinese activities, describing the geography as very competitive with high price competition, lower margins profiles, but great growth.
It is my analysis that Allegion still lacks the proper infrastructure in the space, while Dormakaba seems to have managed quite well. The overall market growth is expected to continue at high-single digits according to both Allegion and Dormakaba.
China grew well in residential electronics, and Dormakaba profited.
The Best For Last: The United States
The United States constitutes the most active market in terms of public companies operating in the space and should therefore be the most interesting to investors looking for an “access solution” company to invest in.
Demand was strong in the US markets in both residential and non-residential sectors. Seeing as most sales originate from the non-residential sector it indicated that both commercial and governmental activity increased.
To illustrate how strong demand was; Allegion management outlined how the orders were at a magnitude where they had to de-bottleneck their operations in Q4-17 to handle the volume.
The orders were simply not able to delivered at the newly intensified pace. Post-bottleneck the demand has remained stable. The backlog has never been stronger for many of the customers, according to Allegion management. Allegion is well-positioned to outline demand movements due to their big-box customers (such as Home depot).
In the residential space the demand for electronics and electromechanical locks increased, but all management teams are currently scrambling to make their locks compatible with Amazon delivery services. When Amazon starts to push sales through the residential area will begin to flare up. Q1-18 had double-digit growth in electronics for some operators, and simply HSD growth for others.
Institutional sales also increased. Institutional sales, such as hospitals and schools, had been weak for a long period of time and an increase is more a return to normalcy than an extraordinary event.
The previous parent company - prior to the 2013 spin-off - of Allegion, Ingersoll-Rand, also mentioned that institutional spending was accelerating. The increase is partly a result of budgets improving and new bond referendums allowing new debt to flow in and push spending projects.
New home construction has performed well, but there have been material bottlenecks in the labor-side of the construction industry according to the Allegion management team. Multi-housing slightly decelerated according to Assa Abloy, and hurricanes delayed several projects according to Dormakaba.
Overall the Americas performed quite well. The current “vertical” to watch for growth would be internal lock systems for commercial and especially institutional clients. Almost every entrance is electromechanical by now, but most internal doors & locks are still mechanical. It will be a while (in my opinion, if ever) before internal electromechanical locks become material in the commercial segment, but many European institutions have begun to utilize it. American institutional electromechanical locks is the most latent growth vertical for now.
Conclusion & Misc Comments
The last 3 quarters have illustrated why the valuations of most access solution companies are currently so elevated. Strong growth across most geographies, excluding the soon-to-rebound Middle East, in conjunction with continued technology adoption is a good accelerator for both operating leverage and pricing exceeding labor inflation.
China is still growing quite well, but the market is still quite competitive. As some major players (Assa and Allegion) are seemingly not investing as much into the market Dormakaba might profit. Given regional competition it is unlikely that price competition will diminish, but acquisition multiples might decrease.
The residential and institutional verticals both performed well in the US for different reasons. Residential looks strong in terms of upcoming retrofitting, but given the invested capital from all sides the competition will probably start out fairly intense.
On a more general note the pricing remained disciplined in the industry, especially in developed markets. Acquisition opportunities were slightly more expensive, but the pipeline is supposedly as strong as it has ever been.
Allegion, Webcast. Great resource for much of the US information. Some on China.
Q1 Numbers from: Gunnebo, Assa, Dormakaba, Allegion.
Q4/backend-2017 Numbers: Dormakaba. Allegion.
Other sources: Ingersoll-Rand Webcast Transcript.
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