Three top-notch small European companies going cheap

Each week, a professional investor tells us where he’d put his money. This week: Francesco Conte of the JP Morgan European Smaller Companies Trust tips his favourites.

The small-cap team at JP Morgan Asset Management employs a disciplined approach based on the notion that attractively valued, high-quality companies with positive momentum outperform the market. We begin by screening the market for value (is the stock cheap?), quality (is the company self-financing?), and momentum (is the company’s strategy succeeding?). We combine this data with fundamental analysis to select an overall portfolio of our best ideas – typically 50 to 70 investments, depending on the economic cycle.

Many of the companies we pick share some common traits: market leadership, pricing power based on a technological edge, asset-light business models and strong management teams. Three outstanding companies fulfilling these criteria are Amplifon from Italy, Norway’s Tomra and TKH of the Netherlands.

The world leader in hearing aids

With about 10% of the global market, Amplifon (Milan: AMP) is by some distance the leader in hearing-aid retailing. Hearing loss is a key theme as populations age, and this trend is often compounded by lifestyle choices such as listening to loud music. The company grows both organically through the acquisition of shops or small chains where they can leverage their significant purchasing power to improve profitability. The business is not economically sensitive and only marginally dependent on national healthcare subsidies.

With more than a 75% global market share, Tomra (Oslo: TOM) is the largest developer and manufacturer of “reverse vending” bottle-recycling systems. Its machines are located in supermarkets or convenience stores in areas that encourage recycling via the use of bottle-deposit schemes. Their machines use a 360-degree instant-recognition system to scan bottles as they are deposited and in return provide the depositor with a voucher to be redeemed in store. Tomra’s large market share reflects its leading technological expertise. As awareness of environmental problems (particularly the damage caused by plastic pollution) grows, we would expect more countries to introduce such deposit schemes to cut down on plastic waste.

Maximising other firms’ productivity

Industrial companies are often capital-intensive. However, success increasingly depends on a company’s ability to innovate and become a technology leader, even in a traditional sector. TKH (Amsterdam: TWEKA), for instance, used to be a traditional cable manufacturer. But over the past ten years it has used its expertise in cable and visual technologies to become a provider of other technologies.

In some markets it simply operates as a supplier. It is the leader in the production of tyre-manufacturing machines, for example, and many of the largest tyre makers use its equipment. However, in many other areas, TKH sells its machine-vision technologies to third parties. Take the lumber industry. Cameras scan uncut tree trunks and artificial intelligence calculates the optimum way to process them by cross-referencing this data against the company’s order backlog. A similar TKH system devised for the food sector analyses the optimum position for a potato to maximise the amount of chips that can be cut from it. As companies seek to maximise productivity, TKH is set for a busy few years.