Treatt — A brilliant half

Treatt (LSE: TET)

Last close As at 27/03/2024

420.00

2.00 (0.48%)

Market capitalisation

257m

More on this equity

Research: Consumer

Treatt — A brilliant half

Treatt has delivered yet another strong set of results. The business continues to perform very well and the constant stream of upgrades demonstrates the strength of momentum as the company moves further up the value chain. The pipeline is looking increasingly strong and recent growth means capacity expansion costing $11-14m is required at Treatt USA and is independent of the UK site relocation. We upgrade our FY18 and FY19 earnings estimates by c 2% and c 4%, respectively.

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Written by

Consumer

Treatt

A brilliant half

H117 results

Food & beverages

9 May 2017

Price

420.00p

Market cap

£218m

Net debt (£m) at 31 March 2017

8.0

Shares in issue

51.9m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.7

63.7

127.0

Rel (local)

8.7

59.9

90.5

52-week high/low

420.0p

163.5p

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

FY trading update

September 2017

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 delivered yet another strong set of results. The business continues to perform very well and the constant stream of upgrades demonstrates the strength of momentum as the company moves further up the value chain. The pipeline is looking increasingly strong and recent growth means capacity expansion costing $11-14m is required at Treatt USA and is independent of the UK site relocation. We upgrade our FY18 and FY19 earnings estimates by c 2% and c 4%, respectively.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/16

88.0

9.6

14.3

4.4

29.3

1.0

09/17e

102.1

13.6

19.9

6.0

21.1

1.4

09/18e

109.3

14.8

21.6

6.5

19.4

1.5

09/19e

114.7

15.6

22.9

6.9

18.3

1.6

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

Strategy delivering excellent results

Treatt’s long-term strategy is to deliver consistent, sustainable growth in profit through developing value-added ingredient solutions, coupled with effective cost control. Improved customer focus and closer relationships are a key part of this strategy, with the ultimate goal of delivering greater profitability by concentrating on the more value-added segments. This has been delivered consistently, with results often beating expectations, and momentum is now accelerating, with more frequent and more significant upgrades coming through. As a result of the H1 results, we upgrade our forecasts for 2018-19 to reflect the improved outlook and pipeline. Our sales forecasts move up c 2-3%, while PBT and EPS increase by c 2-5%, as Treatt’s move up the value chain should deliver a strong improvement in margins.

Momentum remains strong, US capacity expansion

H117 sales were 27% above those of the previous year. A stronger US dollar accounts for c 10% of this, but the remainder is due to impressive organic growth. H1 adjusted PBT was 63% higher than last year. Given the strength of the order pipeline, Treatt USA needs to expand its capacity. Management has announced it will commence work on the expansion in FY17 and it will cost $11-14m. We have updated our forecasts to reflect a $12m spend. The interim dividend is up 7%, and timing has been permanently brought forward to fall in H1. The ingredients space remains attractive, with higher than average growth compared to the wider consumer space. Margins are also typically high at the value-added end as these ingredients are highly specialised and deliver key attributes to the products.

Valuation: Fair value of 438p

Our DCF-derived fair value is 438p (previously 401p), c 5% upside to the current share price. The move is driven by our forecast upgrades and our increased confidence in the business given the positive momentum, which leads us to increase our medium-term sales growth assumption to 4.5% (from 3.5%).

Forecast revisions

We detail our key changes to P&L forecasts in Exhibit 1 below. We have left our main FY17 forecasts unchanged following our recent upgrade in April (detailed in our note). Our EPS change is purely as a result of updating our model for the slightly increased number of shares in issue (the stellar business performance has clearly resulted in a number of share schemes vesting). We have upgraded our FY18 and FY19 forecasts as Treatt is accelerating its move up the value chain, and order books for FY18 are accelerating, as confirmed by the news of the US capacity expansion. We continue to see potential for further upgrades. Improved sales growth should lead to operating leverage, and the move towards value-added products should continue to be beneficial to margins.

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

18.0

-0.4%

12,560

12,560

0.0%

102,126

102,126

0.0%

2018e

19.2

19.5

1.9%

13,353

13,660

2.3%

107,233

109,275

1.9%

2019e

19.8

20.7

4.2%

13,816

14,456

4.6%

111,522

114,739

2.9%

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

We assume the Treatt USA capacity expansion spend is $12m, split evenly between FY17 and FY18. This causes an increase in our FY17 net debt forecast from £1.0m to £5.6m, and our FY18 net debt moves from £11.2m to £16.7m. We note unutilised headroom in borrowing facilities was £16.4m at 31 March 2017, and we continue to expect both the UK relocation and the US expansion projects to be debt-funded. Management, however, has not ruled out equity funding for the UK site relocation, though a decision has not yet been made.


Exhibit 2: Financial summary

£000s

2014

2015

2016

2017e

2018e

2019e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

79,189

85,934

88,040

102,126

109,275

114,739

Cost of Sales

(61,218)

(66,955)

(67,639)

(76,623)

(81,440)

(85,283)

Gross Profit

17,971

18,979

20,401

25,503

27,835

29,456

EBITDA

 

 

9,068

10,307

11,604

15,839

17,607

18,832

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

 

 

7,846

9,063

10,257

14,137

15,786

16,919

Intangible Amortisation

(172)

(175)

(142)

(160)

(160)

(160)

Share based payments

(46)

(198)

(566)

(858)

(933)

(987)

Other

0

0

0

0

0

0

Operating Profit

7,628

8,690

9,549

13,119

14,693

15,772

Net Interest

(724)

(740)

(703)

(559)

(1,033)

(1,317)

Exceptionals

(1,402)

(174)

(553)

0

0

0

Profit Before Tax (norm)

 

 

7,122

8,323

9,554

13,578

14,753

15,603

Profit Before Tax (FRS 3)

 

 

5,502

7,776

8,293

12,560

13,660

14,456

Profit Before Tax (company)

 

 

6,904

7,950

8,846

12,560

13,660

14,456

Tax

(1,553)

(1,786)

(2,144)

(3,203)

(3,483)

(3,686)

Profit After Tax (norm)

5,326

6,537

7,410

10,375

11,269

11,917

Profit After Tax (FRS 3)

3,949

5,990

6,149

9,357

10,177

10,770

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

19.9

21.6

22.9

EPS - normalised & fully diluted (p)

 

 

10.3

12.6

14.1

19.4

21.1

22.3

EPS - (IFRS) (p)

 

 

7.7

11.6

11.8

18.0

19.5

20.7

Dividend per share (p)

3.8

4.0

4.4

6.0

6.5

6.9

Gross Margin (%)

22.7

22.1

23.2

25.0

25.5

25.7

EBITDA Margin (%)

11.5

12.0

13.2

15.5

16.1

16.4

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

9.9

10.5

11.7

13.8

14.4

14.7

BALANCE SHEET

Fixed Assets

 

 

13,777

13,381

16,161

26,951

45,071

48,219

Intangible Assets

1,801

1,736

3,364

3,204

3,044

2,884

Tangible Assets

10,994

10,998

11,361

22,311

40,591

43,899

Investments

982

647

1,436

1,436

1,436

1,436

Current Assets

 

 

43,590

45,045

54,435

51,913

53,873

55,279

Stocks

28,020

25,799

29,990

31,214

32,306

32,774

Debtors

14,509

17,635

17,853

20,199

21,066

22,005

Cash

629

1,477

6,588

500

500

500

Other

432

134

4

0

0

0

Current Liabilities

 

 

(16,005)

(13,481)

(16,388)

(20,877)

(29,461)

(27,352)

Creditors

(12,729)

(12,675)

(15,834)

(16,817)

(17,995)

(18,894)

Short term borrowings

(2,356)

(567)

(487)

(4,060)

(11,466)

(8,458)

Provisions

(920)

(239)

(67)

0

0

0

Long Term Liabilities

 

 

(12,602)

(11,760)

(17,021)

(11,342)

(14,845)

(13,141)

Long term borrowings

(7,857)

(7,065)

(7,755)

(2,030)

(5,733)

(4,229)

Other long term liabilities

(4,745)

(4,695)

(9,266)

(9,312)

(9,112)

(8,912)

Net Assets

 

 

28,760

33,185

37,187

46,644

54,638

63,005

CASH FLOW

Operating Cash Flow

 

 

3,528

8,667

10,804

14,736

16,625

18,125

Net Interest

(724)

(740)

(703)

(559)

(1,033)

(1,317)

Tax

(1,552)

(1,469)

(2,022)

(3,203)

(3,483)

(3,686)

Capex

(538)

(924)

(679)

(12,652)

(20,101)

(5,221)

Acquisitions/disposals

(208)

(103)

(861)

0

0

0

Financing

105

147

280

0

0

0

Dividends

(1,899)

(1,978)

(2,095)

(2,257)

(3,116)

(3,389)

Net Cash Flow

(1,288)

3,600

4,724

(3,936)

(11,109)

4,512

Opening net debt/(cash)

 

 

8,294

9,584

6,155

1,654

5,590

16,699

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

5,590

16,699

12,187

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

245 Park Avenue, 39th Floor

10167, 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

245 Park Avenue, 39th Floor

10167, 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

245 Park Avenue, 39th Floor

10167, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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