Treatt — A full year Treat(t)

Treatt (LSE: TET)

Last close As at 18/04/2024

420.00

2.00 (0.48%)

Market capitalisation

257m

More on this equity

Research: Consumer

Treatt — A full year Treat(t)

Treatt has had yet another outstanding year, continuously exceeding expectations and meeting its 2020 strategic objectives three years early. The board has already approved a plan to drive the business through to 2022 that seeks to build on this success. We raise our EPS forecasts by 3% in FY17 to reflect the strong performance, though our FY18 and FY19 EPS estimates fall by 1-7% due to higher interest costs. Our DCF-derived fair value increases to 522p from 438p, which represents c 10% upside.

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Consumer

Treatt

A full year Treat(t)

FY trading update

Food & beverages

3 October 2017

Price

485.00p

Market cap

£253m

Net debt (£m) at 31 March 2017

8.0

Shares in issue

52.1m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.8)

6.2

126.6

Rel (local)

(1.0)

4.9

111.2

52-week high/low

523.0p

214.0p

Business description

Treatt provides innovative ingredient solutions from its manufacturing bases in Europe, North America and Africa, principally for the flavours and fragrance industries and multinational consumer goods companies, with particular emphasis on the beverage sector.

Next events

FY17 results

28 November 2017

Analysts

Sara Welford

+44 (0)20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Treatt is a research client of Edison Investment Research Limited

Treatt has had yet another outstanding year, continuously exceeding expectations and meeting its 2020 strategic objectives three years early. The board has already approved a plan to drive the business through to 2022 that seeks to build on this success. We raise our EPS forecasts by 3% in FY17 to reflect the strong performance, though our FY18 and FY19 EPS estimates fall by 1-7% due to higher interest costs. Our DCF-derived fair value increases to 522p from 438p, which represents c 10% upside.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/16

88.0

9.6

14.3

4.4

34.0

0.9

09/17e

108.7

14.0

20.6

6.2

23.6

1.3

09/18e

116.3

14.6

21.3

6.4

22.7

1.3

09/19e

122.2

14.5

21.3

6.4

22.8

1.3

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

An exceptional year

FY17 has been an impressive year for the company, with three separate upgrades to guidance. The growth rate achieved in FY17 (c 24% revenue growth, as per guidance) will be hard to replicate and should not be considered the new norm, but it does demonstrate the company is successfully embracing the sweet spot in flavour ingredients. Our net debt figures rise as working capital requirements are increasing (due to the impressive sales growth and also an increase in raw material prices). We now forecast £11m at end FY17, in line with guidance of £11-13m. We continue to base our assumptions on the expectation that both the UK relocation and the US expansion costs – which are progressing as planned – will be debt-funded, but acknowledge that management has not ruled out raising equity.

Ingredients space remains interesting

Growth in the ingredients space remains higher than average for the consumer sector as consumers demand cleaner labels and healthier products but will not compromise on taste; this requires specialist ingredients. Margins are also typically high at the value-added end. Treatt’s ingredient solutions are used both by food ingredients companies in their formulations, and by food and beverages companies directly. Treatt has placed particular emphasis on the beverages space and is becoming increasingly specialised in citrus, tea and sugar reduction.

Valuation: Attractive ingredients play

We value Treatt using a DCF model. We have rolled forward our model to commence in 2018, which, together with the increases to our operating forecasts, indicates a fair value of 522p (previously 438p), an attractive c 10% upside to the current share price. Treatt trades at 25x and 16.1x calendar P/E and EV/EBITDA multiples for 2018, representing discounts of c 9% and 22% to its ingredients peer group, respectively. Given the current growth trajectory of the business, and our forecast for low double-digit CAGR EPS for 2016-20, we believe this level of discount is unwarranted.

Forecast revisions

We detail our key changes to P&L forecasts in Exhibit 1 below. Following the pre-close trading update, our sales forecasts move up by c 7%, in line with the new guidance for FY17. We leave our growth rates unchanged for forecast years, and hence the higher base causes the uplift in sales in the subsequent years. We have made some changes to our net debt assumptions given the greater clarity regarding working capital movements, and the timing of spend on the capital projects. We illustrate these in Exhibit 2 and these affect our PBT and EPS forecasts through higher interest charges.

Exhibit 1: Old vs new key P&L forecasts

EPS (p)*

PBT (£000s)*

Sales (£000s)

Old

New

% change

Old

New

% change

Old

New

% change

2017e

18.0

18.6

3.4%

12,560

12,993

3.4%

102,126

108,729

6.5%

2018e

19.5

19.3

-1.3%

13,660

13,479

-1.3%

109,275

116,340

6.5%

2019e

20.7

19.2

-7.1%

14,456

13,429

-7.1%

114,739

122,157

6.5%

Source: Edison Investment Research. Note: *Stated on company normalised basis, which is pre-exceptional but after amortisation of acquired intangibles and share-based payments.

Exhibit 2: Old vs new net debt forecasts, £000s

Old

New

% change

2017e

5,590

11,000

96.8%

2018e

16,699

26,984

61.6%

2019e

12,187

38,642

217.1%

Source: Edison Investment Research

Valuation update

We illustrate Treatt’s valuation versus its ingredients peer group in Exhibit 3 below. Treatt trades at a significant discount to its peer group on all metrics. Some discount can be applied to reflect its small size and because some of its products are relatively ‘upstream’ in the ingredients spectrum, particularly the bulk ingredients that are sold to other ingredients companies. However, we believe a c 20% discount on EV/EBITDA and P/E is unwarranted.

Exhibit 3: Benchmark valuation

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

Market cap (m)

2017

2018

2017

2018

2017

2018

Givaudan

CHF19,344

26.8

25.1

18.5

17.2

2.8%

3.0%

IFF

$11,286

24.8

22.9

16.5

15.2

1.9%

2.1%

Symrise

CHF9,476

28.4

25.7

15.3

14.1

1.4%

1.6%

Frutarom

ILS16,346

29.7

25.4

19.8

17.3

0.4%

0.5%

Chr Hansen

DKK71,134

43.2

38.8

27.9

25.1

1.8%

1.6%

Kerry

€14,411

24.1

22.2

17.2

15.6

0.8%

0.8%

Ingredion

$8,653

15.9

14.7

9.1

8.4

1.7%

1.8%

Peer group average

27.6

25.0

17.8

16.1

1.5%

1.6%

Treatt

£250.0

23.4

22.7

15.6

12.5

1.3%

1.3%

Premium/(discount) to peer group (%)

-15.2%

-8.8%

-11.9%

-22.3%

-16.2%

-18.8%

Source: Bloomberg (prices as of 2 October 2017). Note: Treatt figures are calendarised to aid comparison.

Our DCF-derived fair value is now 522p (previously 438p) following the changes to our model detailed in our forecast review section above. We have also rolled our DCF model forward to commence in 2018. Our longer-term sales growth forecast remains at 3.5% pa, falling to 2% growth in perpetuity. Our DCF is calculated based on a WACC of 7.3% (encompassing a beta of 0.8, an equity risk premium of 5.0% and a borrowing spread of 5.0%) and a terminal growth rate of 2%.

Sensitivities

Despite 60% of turnover being exposed to the ‘defensive’ beverage sector, Treatt has a couple of key sensitivities, which it seeks to mitigate through the in-depth knowledge and skill base of its buying team and undertaking an active hedging policy where possible:

Commodity exposure: namely citrus oils, which make up c 30% of revenues.

Foreign exchange: translation risk on US dollar profits, which it manages through hedging.

Exhibit 4: Financial summary

£000s

2014

2015

2016

2017e

2018e

2019e

Year end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

79,189

85,934

88,040

108,729

116,340

122,157

Cost of Sales

(61,218)

(66,955)

(67,639)

(82,012)

(87,171)

(91,285)

Gross Profit

17,971

18,979

20,401

26,717

29,169

30,872

EBITDA

 

 

9,068

10,307

11,604

16,392

20,597

24,016

Operating Profit (before amort., except and sbp.)

 

 

7,846

9,063

10,257

14,580

16,258

17,380

Intangible Amortisation

(172)

(175)

(142)

(160)

(160)

(160)

Share based payments

(46)

(198)

(566)

(887)

(920)

(917)

Other

0

0

0

0

0

0

Operating Profit

7,628

8,690

9,549

13,533

15,178

16,303

Net Interest

(724)

(740)

(703)

(540)

(1,699)

(2,874)

Exceptionals

(1,402)

(174)

(553)

0

0

0

Profit Before Tax (norm)

 

 

7,122

8,323

9,554

14,040

14,559

14,506

Profit Before Tax (FRS 3)

 

 

5,502

7,776

8,293

12,993

13,479

13,429

Profit Before Tax (company)

 

 

6,904

7,950

8,846

12,993

13,479

13,429

Tax

(1,553)

(1,786)

(2,144)

(3,313)

(3,437)

(3,424)

Profit After Tax (norm)

5,326

6,537

7,410

10,727

11,122

11,082

Profit After Tax (FRS 3)

3,949

5,990

6,149

9,680

10,042

10,005

Average Number of Shares Outstanding (m)

51.3

51.5

51.9

52.1

52.1

52.1

EPS - normalised (p)

 

 

10.4

12.7

14.3

20.6

21.3

21.3

EPS - normalised & fully diluted (p)

 

 

10.3

12.6

14.1

20.1

20.8

20.7

EPS - (IFRS) (p)

 

 

7.7

11.6

11.8

18.6

19.3

19.2

Dividend per share (p)

3.8

4.0

4.4

6.2

6.4

6.4

Gross Margin (%)

22.7

22.1

23.2

24.6

25.1

25.3

EBITDA Margin (%)

11.5

12.0

13.2

15.1

17.7

19.7

Operating Margin (before GW and except.) (%)

9.9

10.5

11.7

13.4

14.0

14.2

BALANCE SHEET

Fixed Assets

 

 

13,777

13,381

16,161

19,820

41,066

58,102

Intangible Assets

1,801

1,736

3,364

3,204

3,044

2,884

Tangible Assets

10,994

10,998

11,361

15,180

36,586

53,782

Investments

982

647

1,436

1,436

1,436

1,436

Current Assets

 

 

43,590

45,045

54,435

65,892

69,423

72,380

Stocks

28,020

25,799

29,990

43,344

45,564

47,598

Debtors

14,509

17,635

17,853

22,048

23,359

24,283

Cash

629

1,477

6,588

500

500

500

Other

432

134

4

0

0

0

Current Liabilities

 

 

(16,005)

(13,481)

(16,388)

(25,571)

(37,481)

(46,211)

Creditors

(12,729)

(12,675)

(15,834)

(17,905)

(19,158)

(20,116)

Short term borrowings

(2,356)

(567)

(487)

(7,666)

(18,323)

(26,095)

Provisions

(920)

(239)

(67)

0

0

0

Long Term Liabilities

 

 

(12,602)

(11,760)

(17,021)

(13,145)

(18,273)

(21,959)

Long term borrowings

(7,857)

(7,065)

(7,755)

(3,833)

(9,161)

(13,047)

Other long term liabilities

(4,745)

(4,695)

(9,266)

(9,312)

(9,112)

(8,912)

Net Assets

 

 

28,760

33,185

37,187

46,996

54,734

62,312

CASH FLOW

Operating Cash Flow

 

 

3,528

8,667

10,804

2,396

18,120

21,817

Net Interest

(724)

(740)

(703)

(540)

(1,699)

(2,874)

Tax

(1,552)

(1,469)

(2,022)

(3,313)

(3,437)

(3,424)

Capex

(538)

(924)

(679)

(5,631)

(25,745)

(23,832)

Acquisitions/disposals

(208)

(103)

(861)

0

0

0

Financing

105

147

280

0

0

0

Dividends

(1,899)

(1,978)

(2,095)

(2,257)

(3,223)

(3,344)

Net Cash Flow

(1,288)

3,600

4,724

(9,345)

(15,985)

(11,658)

Opening net debt/(cash)

 

 

8,294

9,584

6,155

1,654

11,000

26,984

HP finance leases initiated

0

0

0

0

0

0

Other

(2)

(171)

(223)

(0)

(0)

0

Closing net debt/(cash)

 

 

9,584

6,155

1,654

11,000

26,984

38,642

Source: Edison Investment Research, Treatt accounts

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Treatt and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Treatt and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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