Falling Plastic Demand Will Crush Margins Amid Rising Asian Competition

Key Takeaways

• Declining plastic usage, new recycling models, and increased competition threaten Tomra's core business and long-term growth prospects.
  
• Heightened regulatory, economic, and supply chain uncertainties undermine revenue stability, margin strength, and forward visibility.
  
• Expansion into new markets, strict EU recycling rules, product innovation, and diversification support Tomra's long-term growth, resilience, and profitability despite market volatility.

Catalysts

Provides sensor-based solutions for optimal resource productivity worldwide.

• The ongoing decline in plastic usage and stronger industry focus on alternative, non-plastic sustainable packaging solutions continue to erode the long-term addressable market for Tomra's core reverse vending and collection business, threatening to stagnate revenue growth and making recovery even in new DRS markets uncertain.
  
• Heightened economic and regulatory uncertainty in key developed regions, particularly Europe and North America, is leading to delayed or postponed deposit return scheme installations and recycling equipment investments, signaling persistent lumpiness and a weaker revenue pipeline for multiple divisions through the medium term.
  
• The surge of low-cost Asian competitors and new entrants leveraging rapidly advancing digital and AI-driven sorting technologies is undermining Tomra's pricing advantage and intensifying margin pressure, pointing toward persistent gross margin compression and an erosion of net profitability as industry dynamics shift.
  
• Structural shifts toward decentralized or hyper-local recycling models, encouraged by community-led and municipal initiatives, are systematically reducing dependency on large-scale, automated machinery providers like Tomra, directly constraining the long-term volume expansion opportunities and threatening the stability of annuity-like service and replacement revenues.
  
• With global trade tensions and highly unpredictable tariffs on key equipment and inputs, Tomra is increasingly exposed to costly supply chain disruptions and diminished cross-border project feasibility, compounding the risk of negative impact on order intake visibility, installed base growth, and overall earnings consistency for years to come.

Tomra Systems Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tomra Systems compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tomra Systems's revenue will grow by 12.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.7% today to 10.6% in 3 years time.
• The bearish analysts expect earnings to reach €206.3 million (and earnings per share of €0.71) by about July 2028, up from €104.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.6x on those 2028 earnings, down from 33.7x today. This future PE is lower than the current PE for the GB Machinery industry at 25.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.59%, as per the Simply Wall St company report.

Tomra Systems Future Earnings Per Share Growth

Risks

• Despite current market volatility, Tomra Systems faces robust long-term growth opportunities as more countries, such as Poland, Portugal, Spain, Moldova, and the UK, implement or expand deposit return systems, which can drive higher recurring revenues and order backlogs in Collection over the coming years.
  
• Regulatory requirements in the EU, like the upcoming 35 percent minimum recycled content for plastic packaging by 2030, are set to significantly boost demand for advanced sorting and recycling technology, potentially resulting in long-term revenue and market share growth for the Recycling division.
  
• Continuous product innovation, exemplified by Tomra's launch of new reverse vending machines designed for the Polish market and leadership in food sorting technology (e.g., LUCAi for citrus), helps maintain pricing power and support healthy gross margins and profitability in both Collection and Food segments.
  
• The Food division is demonstrating record EBITA, strong double-digit growth in order intake and backlog, and improved cost structure from restructuring efforts, indicating a resilient earnings base with potential for continued margin expansion.
  
• Tomra's diversification into emerging verticals such as advanced feedstock processing and reusable packaging, combined with a solid financial position, ample liquidity, and affirmed credit ratings, strengthens its ability to invest for future growth and shield long-term earnings from cyclical shocks.

Valuation

• The assumed bearish price target for Tomra Systems is NOK130.07, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Tomra Systems's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK214.43, and the most bearish reporting a price target of just NOK130.07.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €2.0 billion, earnings will come to €206.3 million, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of NOK141.3, the bearish analyst price target of NOK130.07 is 8.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.