Growth prospects positive for IR spinoff Allegion

As a stand-alone entity, Allegion will have free cash flow of $150 to $200m solely for security
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Tuesday, December 3, 2013

DUBLIN, Ireland—Ingersoll Rand spinoff company, Allegion, is now an independent, pure play security company, “a $2 billion startup” with potential for continued growth in North America and big growth outside of North America, according to Allegion executives Dave Petratis and Tim Eckersley, as well as security analyst Jeff Kessler, who all spoke to Security Systems News.

“Allegion has done exceptionally well in the U.S. bringing multiple brands together in a situation where a specifier or architect or integrators [can find] multiple pieces to complete a solution,” said Kessler, managing director of institutional research at Imperial Capital.

According to Imperial Capital, the group that is now Allegion generated “revenue of $1.5 billion, EBITDA of $317 million and EPS of $1.38 during the nine months ending September 2013. …It has $127 million in cash and $1.3 billion [in debt as of last month].”

Petratis, CEO of Allegion, told SSN that Allegion will add about 300 employees, “about half of them in association with standing up the company [including procurement, IT communications personnel.]” The other 150 will be targeted toward market expansion in North America and abroad.

Petratis said the company also will look at acquisitions. He noted that Allegion can now “focus specifically of the security and safety space [with] … some of the most powerful brand names … and a large installed base.”

That installed base can be leveraged to solve complex security problems, he said. As an example, he cited work that IR has done at the University of Miami where mobile devices can be used for access to dorm rooms and other functions as diverse as ordering meals.

Eckersley, Allegion SVP and president of the Americas region, echoed Petratis, saying the pace of innovation can be sped up as a result of the spinoff. As a part of the conglomerate, IR’s security division had to compete for capital allocation at the enterprise level. Not anymore.

“We’ll have free cash flow of about $150 to $200 million to focus primarily and purely on the security business,” Eckersley said. “It [investment in security] will not take a back seat to the larger businesses that are part of IR.”

Headquartered here in Dublin, Allegion has regional corporate centers in Carmel, Ind., Brussels, Belgium and Shanghai, China. It does business in 120 countries, has 7,600 employees and sells security products under 23 brands including Schlage, Von Duprin and LCN. It specializes in “security around the door.”

Allegion does about 75 percent of its business in the Americas, according to Kessler. He estimates Allegion’s North American market share to be about $1.48 billion. That places it between its two closest competitors, ASSA ABLOY and Kaba, according to Kessler. ASSA ABLOY does about 20 percent of its business in North America, but has a slightly higher market share at $1.5 billion. Kaba does about 29 percent of its business in North America and has a market share of $310 million, Kessler said.

Kessler said that Allegion’s North American business is in good hands under the leadership of Eckersley, who, he said, “runs a really good show.” Eckersley oversaw the commercial market for security at IR for the past six years and now also oversees the residential market in his new role. Eckersley is responsible for about $1.5 billion of Allegion’s business.

Eckersley said that Allegion’s electronic locking business “is up 30 percent year-to-date over last year.” He said that is the result of “focused investment in capabilities, development of the channel structure and resources to support the business.”

He said that Allegion’s newer locks introduced in 2010 are “modular in nature. That means that when a lock is installed “80 percent of [the product] will remain on the door and 20 percent will evolve over time.” The locks are designed to be easily upgraded. Eckersley called 2013 “a break-out year on volume” for these new products.

In Europe, Allegion is smaller than its two closest competitors, ASSA ABLOY and Kaba. Kessler said Allegion has operational losses in Europe, but it could turn that around. “This [spinoff] could be a catalyst to improve their earnings and return substantially [in Europe] if they can get through some of their problems they face in Europe,” Kessler said.

In Kessler’s opinion, Allegion’s current corporate structure and product suite is not as well integrated in Europe as it is in the U.S. Changes there could help, he said, but it will take more than a couple quarters to see results.

Imperial Capital is maintaining its in-line rating of $44 on the stock, with a one-year price target of $50. Allegion closed its first day of trading, Dec. 2, at $43.13.