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Rating action

Scope Ratings GmbH (Scope) has today affirmed Norway-based capital goods company TOMRA systems ASA’s issuer rating of A-/Stable. Scope has also affirmed TOMRA’s short-term debt rating at S-1 and senior unsecured debt rating at A-, in line with the issuer rating.

Rating rationale

The company’s business risk profile (assessed at BBB+) continues to reflect positive industry dynamics, strong market positions within all its business segments, growing demand for the company’s products and a large share of recurring revenue across segments. Historical yearly revenue growth has been around 10%, reflecting growing demand for recycling driven by legislation, end-user demand and industry initiatives, trends that are expected to continue (positive ESG factor). The company is the clear global market leader in reverse vending machines for beverage container collection, with about 82,000 machines installed in over 60 countries. It also holds leading positions within sensor-based sorting equipment for recycling and ore sorting, with market shares of 55%-60%. Lastly, it holds strong positions in the global food sorting market, but this market is more fragmented than the two others. The positions are reflected in a strong and stable historical EBITDA margin, around 20%-22%. Additionally, the company has substantial revenue from service contracts (about half of collection revenue), which adds stability to earnings and cash flow. Diversification by geographies, customers and end-markets constitute additional strengths. All the company’s products being based on the same technology, its smaller size (measured by turnover) and niche focus compared to other global capital goods companies somewhat constrain the business risk profile.

2022 saw prolonged supply chain disruptions and surging costs following Russia’s invasion of Ukraine and Russia’s weaponising of natural gas deliveries to the EU. Although partly mitigated by increased demand for recycled materials, this resulted in a decrease in TOMRA’s EBITDA margin to 19.4%, down from a record-high 22.1% in 2021. In addition, preparations for a new deposit return system roll out in 2023 led to larger-than-expected negative working capital swings, which were in part debt financed. Consequently, TOMRA ended 2022 with a Scope-adjusted debt/EBITDA at 1.3x. The company’s financial risk profile (assessed at A) is still strong, although leverage is higher than projected during Scope’s last review (0.9x).

Scope expects the company’s leverage to remain strong despite higher-than-historical capital expenditure, ranging from NOK 1,000m to 1,600m per year. This is driven by the belief that TOMRA will continue to use its position as the leading global provider of reverse vending machines and win tenders in the medium-term (particularly in 2024E/2025E). In addition, Scope favourably notes the momentum in the company’s recycling division, which saw a 26% year-on-year organic revenue growth and ended 2022 with record-high order backlogs. As a result, Scope expects strong cash flows, which in addition to TOMRA’s prudent financial policy (dividends at 40%-60% of earnings) and limited large M&A opportunities, will enable the company to pursue its investment strategy without deteriorating its balance sheet. However, Free Operating Cash Flows is expected to remain the weakest element of TOMRA’s financial risk profile, as higher-than-historical investments will lead to low FOCF/debt for certain years.

Liquidity is adequate. At YE 2022, the company had NOK 740m in cash and equivalents and about NOK 1.3bn in unused committed credit facilities, against no short-term interest-bearing liabilities (excluding leases). The company has ample headroom under its financial covenants stipulating a minimum equity ratio of 30% (actual figure of 47.2% at YE 2022) and a net interest-bearing debt/EBITDA (company definition) of less than 3.0x (it achieved 1.2x at YE 2022).

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Stable Outlook reflects TOMRA’s strong market positions within its established segments, which Scope believes will continue to shape TOMRA’s medium-term performance. It also reflects Scope’s expectations of stable revenue from service on an increasing number of installed reverse vending machines. Further, it assumes that TOMRA will uphold its higher-than-historical capex level and that free operating cash flows will be low for certain years, but that leverage still remain at conservative levels. Lastly, it assumes that operations will still be supported by positive industry dynamics, including the EU recycling directives triggering new deposit return system markets, of which TOMRA is well positioned to win significant portions.

A positive rating action could be triggered by an improving financial risk profile, exemplified by FOCF/debt > 25% or Scope-adjusted debt/EBITDA sustained at below 1.0x.

A negative rating action could be triggered by a weaker financial risk profile, exemplified by Scope-adjusted debt/EBITDA sustained at around 2.0x.

Long-term and short-term debt ratings

All debt is issued by TOMRA Systems ASA.

The senior unsecured debt rating has been affirmed at A-, in line with the issuer rating. This is based on the company’s standard bond documentation, which includes a pari passu and negative pledge.

The S-1 short-term debt rating has been affirmed, reflecting the issuer rating, as well as the company’s strong short-term debt coverage and continued access to bank and capital markets.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and Outlook, (General Corporate Rating Methodology, 15 July 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Michael-Marco Simonsen, Associate Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 23 June 2022. 

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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