We've Become More Optimistic on the Expansion of Assa Abloy's Addressable Market

A recent pullback of Assa Abloy's shares offers 20% upside from our increased fair value estimate of SEK 300 per share. We expect 14% earnings growth during 2022-25, including acquisitions. We've become more optimistic on the expansion of Assa Abloy's addressable market, expecting an acceleration in the pace of electromechanical lock adoption to 2% incremental penetration a year from an estimated 1% over the last several years. Relative to mechanical locks, which command 85%-90% of the market, electromechanical locks sell at twice the price or more, but generate a similar operating profit margin. Customers are willing to pay higher prices due to the greater perceived value of the product with benefits of greater access control and convenience. We forecast electromechanical locks climbing the innovation adoption curve from the current early-adopter phase to the early-majority phase over the next 10 years. In the combined Europe and U.S. markets by 2031, we expect adoption rates to rise to 30%-35% from the current 8% and 15% in residential and nonresidential buildings, respectively. Assa Abloy's wide moat stems from top brands that lower customer search costs. Product innovation reinvestment closes the gap between competitor product benefits and search costs. Earlier gains in penetration adoption rates create a leveraged effect on Assa Abloy's potential profit pool: a 2% adoption rate bump expands the addressable market by 3% due to the small starting base.