The market is waking up to the appeal of Europe’s sustainability-focused industrial market leaders against a backdrop of global fiscal stimulus. Companies with strong balance sheets and a record of generating persistently high cash returns and high levels of recurring revenues were in a robust position already. Add in large amounts of fiscal stimulus focused on building back better through green and digital technology, and the exciting opportunities multiply.
Hands-free access to the office
What’s more, the post-pandemic new-build market is likely to have a strong emphasis on hands-free access, which plays to Assa’s strengths, and should see a compound annual growth rate of at least 10% maintained over the cycle. At some three times the size of its nearest competitor, Allegion, Assa’s advantage is its size; there is also scope for bolt-on acquisitions in a fragmented market.
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Thales (Paris: HO), which makes electrical systems for the aerospace and defence industries, has multiple world-class businesses characterised by ample scope for growth and identifiable barriers to entry (characteristics that allow it to fend off rivals), including a large installed base leading to high levels of recurring revenues. This means the company has the potential to continue to generate persistently high cash returns (off a near-3% dividend yield) set against a favourable valuation of low-teens estimated earnings for 2022.
Global market-leading positions in avionics and air-traffic management systems mean the company is well-placed to benefit from a recovery in aerospace activity post-pandemic. European defence expenditure looks likely to continue to rise from low levels in the face of increasingly complex geopolitics. There are clear signs of recovery in satellites, where Thales forms half of a duopoly position in Europe. The group’s cyber and biometric-identity technology is high-quality, and unique at the price when compared with pure-play peers globally.
Building back better
Kaufman & Broad (Paris: KOF), based in Paris, is one of France’s largest housebuilders. It has a strong record of generating persistently high cash returns, averaging around 20% per annum for the last eight years. Its cash-conversion ratio (how fast capital investment is converted into cash) is excellent, supported by the sale-before completion model, and the balance sheet is robust, characterised by negative net-debt-to-equity of -15% at the end of 2020.
We think Kaufman & Broad is well positioned to build back more sustainably and create jobs. The company’s focus on residential and commercial-to-residential rebuilding, along with its strong environmental and social governance (ESG) credentials, put it in pole position.
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