Most investors I have met, and I include myself, like to describe their investment horizon as long-term. This may well be true, but in some cases the words can be used if an investment has not really performed as planned. “We have a long-term view of the company” can sometimes be interpreted as “We were wrong in the short term but if we keep the holding long enough it will get better”.
Being long-term is something I strive to achieve. After a number of years as an analyst, I became a fund manager in 2008. Over the subsequent years many of the holdings have been with us for a long time, but only one has remained in the portfolio for all my years as a manager. This company is Norwegian industrial group Tomra. In 2008, Tomra’s share price was just over NOK 20. We were interested in identifying companies with exposure to recycling, and our analysis of Tomra revealed a company with an attractive fundamental valuation and good growth potential, but also a company that was not utilising its substantial technical know-how in new business areas. This was to change over the next few years, and the share is today traded at almost NOK 200.
Tomra was founded in 1972 by brothers Petter and Tore Planke, when a grocery store needed a machine that could recycle empty bottles, and is today the world leader in various recycling systems. Each year Tomra’s machines collect 35 billion beverage containers, including cans and bottles. This is quite simply a company that has sustainability as its business concept. Before I go into Tomra’s business there are two events that have been the basis of the company’s success in recent years. The first was when Stefan Ranstrand took over as CEO in 2009. Stefan saw the potential to use Tomra’s advanced technology for new applications and, together with his team, added to the product offering through acquisitions, particularly in Sorting Solutions. The second important event was when Latour acquired about 15 percent of Tomra in 2011. Latour is undeniably a top-quality owner and has upped its stake to almost 30 percent over the years.
Tomra is organised into two business areas, Collection and Sorting Solutions, with sales for each segment currently similar. Collection Solutions is the oldest business segment and has approximately 82,000 deposit systems installed. Paying a deposit and sorting waste is an everyday thing in the Nordics, but not so in most of the world, which means very interesting growth opportunities for Tomra. Tomra’s global market share for reverse vending machines is over 75 percent. Parts of Australia recently introduced a deposit system, and on March 28 the British government announced a desire to introduce a deposit system as part of its 25-year environmental plan. The latest news came yesterday when the Indian state of Gujarat announced that it will also introduce deposits. Gujarat has around 70 million inhabitants. Opportunities to grow, in other words!
The second business area, Sorting Solutions, has grown rapidly, both organically and through acquisitions. Tomra has about 12,000 installed units in more than 80 countries. The largest customer segment is the food industry, followed by recycling and mining. In the food industry, Tomra’s products help to improve processing capacity and availability while improving profitability, quality and food safety. Some of Tomra’s machines can handle up to 40,000 items per second, with the sensor technology able to measure and process information such as content, shape, density, size, colour and even damage to different foods. Driving factors in this area are increased food consumption, an expanding middle class globally, the food industry’s focus on productivity, cost-efficiency and sustainability, consumer demand for quality and greater focus on food safety. Tomra’s global market share for the sorting segments in which it operates is this year between 45 and 65 percent.
The valuation of Tomra has certainly risen recently, given the strong performance of its share, and it is trading at P/E 24 on next year’s earnings. Quality companies with high growth are rarely cheap. We believe that the company’s good and relatively non-cyclical growth opportunities outweigh its somewhat high valuation. Tomra will remain part of my long-term portfolio.