EU Packaging Waste Regulations Will Create Future Recycling Opportunities

Key Takeaways

• Strategic restructuring and acquisitions coupled with legislative changes provide growth opportunities, enhancing revenue, profitability, and margins for TOMRA.
  
• Expansion into new and existing markets supports future revenue growth, fueled by positive sentiment and innovations in recycling and food processing.
  
• Expanding into new markets and business areas presents risks of uneven revenue, cash flow challenges, and stress on margins due to delays and execution variability.

Catalysts

Provides sensor-based solutions for optimal resource productivity worldwide.

• Increasing global focus on circular economy and legislative changes, such as the Packaging and Packaging Waste Regulation in the EU and new deposit schemes in multiple countries, provide strong growth opportunities for TOMRA. This is expected to boost revenue and potentially improve net margins due to increased economies of scale.
  
• The successful restructuring in the Food segment, including cost savings and operational improvements, positions the company for enhanced profitability and could improve net margins and earnings in the future.
  
• The acquisition of c-trace, a digital waste management company, offers potential revenue synergies and operational efficiencies, which could positively impact future earnings and profitability.
  
• Positive market sentiment and expected growth in certain segments, such as metals in Recycling driven by PULSE machine, and expected recovery in food processing categories like citrus and potatoes, suggest potential revenue growth and margin expansion.
  
• Continued expansion into new markets, such as Poland, Tasmania, and potentially Portugal, coupled with high activity in existing markets, are expected to contribute significantly to revenue growth over the coming years.

Tomra Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tomra Systems's revenue will grow by 13.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 10.6% in 3 years time.
• Analysts expect earnings to reach €207.2 million (and earnings per share of €0.7) by about March 2028, up from €93.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €243.6 million in earnings, and the most bearish expecting €185.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.4x on those 2028 earnings, down from 44.0x today. This future PE is greater than the current PE for the GB Machinery industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

Tomra Systems Future Earnings Per Share Growth

Risks

• The softer market sentiment in plastics recycling is not expected to recover in the short term, potentially impacting recycling segment revenue and growth.
  
• A significant portion of revenue is coming from new markets with anticipated slower rollouts like Poland; delays and uncertainties in these rollouts could result in uneven or back-end loaded revenue recognition, affecting cash flow expectations.
  
• Market recovery in the Food segment, particularly in fresh food, remains uncertain; delayed or postponed large orders could pose risks to future revenue and profitability in this segment.
  
• TOMRA’s entry into new business areas like TOMRA Feedstock adds capital intensity and operational costs, with the potential for only limited initial revenue, thus impacting cash flow and margin performance until ramp-up is achieved.
  
• Expanding operations in diverse geographical locations introduces risks associated with execution and market adoption differences, which could translate into variable revenue streams and place stress on net margins.

Valuation

• The analysts have a consensus price target of NOK175.0 for Tomra Systems based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK220.0, and the most bearish reporting a price target of just NOK120.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.0 billion, earnings will come to €207.2 million, and it would be trading on a PE ratio of 26.4x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of NOK161.3, the analyst price target of NOK175.0 is 7.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.