Quiet disruption

Disruptive technology can be a great source of potential growth, giving companies an edge over competitors and allowing them to benefit from structural shifts, even in a low-growth environment. Chi Chan, European Equities Portfolio Manager at Hermes Investment Management, holds shares in TKH in his strategy - an industrial company that shows disruptive technology isn’t limited to the tech space.

Mention the word ‘disruption’ and usually companies like Tesla, Uber or Airbnb spring to mind. However, disruption is not just limited to the technology sector, it is happening all the time across all industries.rnrnChange is one of the elements we look for in an investment. Whether the world is growing by 1% or 2% is less important than the expansion, or contraction, of the individual markets that a company may be operating in.

Look at the challenges facing a company such as McDonalds, selling fast food to a world becoming increasingly health conscious. It needs a company such as Kerry Group – a global leader in taste and nutrition – to help it to reduce excessive fat, sugar and salt without compromising taste. There are many examples of companies on the wrong side of change, but we are trying to identify where we can invest in industries offering structural growth and the companies capitalising on industry shifts and offering goods in demand.

Disruptive technology comes in different forms

A good example of an under-the-radar company disrupting an industry is Dutch group TKH. This former cable manufacturing company has transformed itself into an innovative industrial solutions provider.

The most well-known of its operations is VMI, the group’s tyre manufacturing systems subsidiary. By incorporating its high speed vision systems into the tyre-making process, VMI has become the dominant third-party equipment supplier to the industry over the last decade. Not bad for a division the CEO told us his board was asking him to sell or close down when he was originally appointed. VMI is now looking to supply to the larger tyre manufacturers who have traditionally utilised in-house machinery, as it can now offer next generation machines that can switch tyre types with zero downtime – a huge benefit to an industry struggling with inventory management as consumers demand more choice.

Another division we believe has strong growth potential is in runway lighting systems. TKH has developed a system with more functionality and flexibility than traditional methods, yet costing a third of the price. Using CEDD (Contactless Energy and Data Distribution) technology, each light can be controlled separately and the installation and replacement is simple. This means more flexibility and ease of guiding planes through their landing and taxi through the airport. Runway downtime is reduced as maintenance and repairs can be performed quickly and with higher safety levels. The huge demand for this product only became apparent after TKH posted a YouTube video of a system demo that saw airports around the world contact the company with enquiries.

Other areas of disruption TKH is currently involved in include parking technologies, fibre optic networks, tunnel connectivity and surveillance solutions, integrated oil & gas solutions and machine vision. TKH is a great example of a company on the right side of change, disrupting a wide range of established business models.

Not being as well-known as the disruptive tech poster-child stocks, such as Tesla, has its benefits. It means the share price doesn’t include the “hype” premium that accompany the former – a great company that everybody already knows is great will rarely come at a bargain price. The TKH shares trade on less than 15x 2016 P/E, an attractive valuation considering the very strong earnings growth that we believe is possible in the coming years.

The views and opinions contained herein are those of Chi Chan and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products.