Otis (OTIS): Digitisation benefits make Otis a better business

We expect OTIS shares to generate an IRR of 10-13% with less than market risk and limited downside.

OTIS has proven itself to be resilient and defensive with significant improvements over the past 2-3 years after splitting from UTX in 2020.

• The conclusion we have reached is that digitisation, especially IoT, benefits the incumbent. In this case Otis can offer a better service vs independents, and will hence retain a larger portion of service contracts.

• We think this is a critical piece of the puzzle. Otis lost share in servicing to independents in the past, digital gives them a strategic advantage in retaining service contracts that is likely to last for a long time.

• Benefits are win-win: The customer sees fewer breakdowns, better service response times. While Otis sees higher service win rates, lower churn and more efficient use of its technicians, enabling margin expansion.

IRR summary:

• Services growth of ~6%.

• Operating margin expansion of 50bps, fading to 20-30bps in four years.

• Share reduction of ~2%-2.5% per year

• Gives EPS growth of 10-12% for the next few years, fading to ~9-10%.

• Plus a dividend yield of 1.67%.

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