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Investing.com -- S&P Global Ratings has revised its outlook for Assa Abloy (OTC:ASAZY), the Sweden-based lock and building access solutions provider, to negative from stable. The revision is due to slower deleveraging, with the company’s adjusted funds from operations (FFO) to debt expected to stay slightly below the 30% downside threshold in 2025. The slower deleveraging is attributed to a higher-than-expected acquisition pace and lower profitability caused by restructuring and integration costs.
However, S&P Global Ratings expects a gradual improvement in Assa Abloy’s FFO to debt in 2026. This is due to the anticipated recovery of its adjusted EBITDA margin to close to 20% from 18.5%-19.0% this year and a robust free operating cash flow (FOCF). Despite this, acquisition spending could remain above historical levels, further constraining the company’s deleveraging trajectory.
Assa Abloy’s ’A-’ long-term issuer credit rating and issue rating on the company’s unsecured debt have been affirmed by S&P Global Ratings, along with the ’A-2’ short-term issuer credit rating and the ’K-1’ Nordic scale rating. The ratings are supported by the group’s strong FOCF-to-debt ratio of more than 25% on average for 2024-2026, which is better than typically more capital-intensive peers.
The revised negative outlook reflects the possibility of a downgrade for Assa Abloy if it does not restore its adjusted FFO to debt comfortably above 30% by 2026, or if its FOCF to debt falls below 25% with limited recovery prospects.
Assa Abloy’s adjusted debt is expected to remain elevated at about Swedish krona (SEK) 72.4 billion this year, broadly in line with the Dec. 31, 2024 level. This is due to the ongoing execution of its bolt-on acquisitions strategy. Acquisition spending net of disposals reached SEK11.2 billion in 2024, after SEK45.2 billion in 2023, following the SEK48 billion HHI acquisition, which significantly increased the company’s indebtedness.
Assa Abloy’s profitability is expected to decline temporarily in 2025, due to restructuring and integration costs. The group’s EBITDA margin is projected to decline to 18.7% from 19.8% in 2024, as a result of about SEK1.3 billion of restructuring costs linked to the company’s 10th manufacturing footprint program (MFP) and expenses linked to the integration of its most recent acquisitions.
Uncertainty around U.S. tariffs poses some risks to the 2025-2026 forecast. About 70% of Assa Abloy’s products sold in the U.S. are produced locally, which limits its direct exposure to duties on imported goods. However, a slower recovery in U.S. residential and commercial new construction or weakening consumer demand linked to persistent inflation and high interest rates could constrain Assa Abloy’s revenue growth and operating leverage. In addition, prolonged sizable tariffs on imported goods from China (about 10% of the value of the group’s U.S. sales) would call for material price increases to compensate the impact, which the group estimates at about 10%.
The negative outlook reflects that S&P Global Ratings could downgrade Assa Abloy over the next 12-24 months if the company does not restore FFO to debt comfortably above 30% by 2026 onwards due to prolonged high acquisition spending or weaker-than-expected profitability, or if its FOCF to debt falls below 25% with limited recovery prospects. A downgrade could also occur if the group is unlikely to improve its FFO-to-debt ratio sustainably above 30% by 2026 or to maintain its FOCF-to-debt ratio above 25%.
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