A good start to the year

Treatt 7 May 2019 Update
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Treatt

A good start to the year

H119 results

Food & beverages

7 May 2019

Price

406.50p

Market cap

£239m

Net cash (£m) at 31 March 2019

9.4

Shares in issue

59.1m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.8

(6.2)

(11.8)

Rel (local)

5.3

(6.0)

(8.1)

52-week high/low

508.00p

388.00p

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

FY19 results

26 November 2019

Analysts

Sara Welford

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Treatt is a research client of Edison Investment Research Limited

Treatt has delivered another period of strong revenue and profit growth, demonstrating its transformation from a trading house to a provider of value-added, technical flavour and fragrance solutions. Its key categories of citrus, tea and sugar-reduction continue to drive profit growth. After a few years of increasing raw material costs, Treatt is experiencing some falling prices, particularly in citrus. Citrus represents c 50% of company revenues – and Treatt’s historical area of expertise – and falling raw material prices tend to result in selling price deflation. Crucially, they do not necessarily result in a fall in profits, as due to timing of contracts, the fall in raw material costs is not always fully passed onto customers. We trim our FY19 and FY20 sales forecasts in light of raw material deflation, but we leave our profit forecasts broadly unchanged. Our fair value moves to 517p (from 510p) as we roll forward our DCF to commence in 2020.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/17

101.3

12.8

18.5

4.8

21.9

1.2

09/18

112.2

13.8

20.3

5.1

20.0

1.3

09/19e

113.8

14.0

18.1

5.1

22.4

1.3

09/20e

116.1

14.7

19.0

5.8

21.4

1.4

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

US expansion complete, UK relocation continues

The $14m expansion of the existing US facility was completed on schedule in March and will be fully operational in June. It brings significant additional capacity in non-citrus. The UK project is more complex; planning consent has been obtained, and construction is due to commence in the summer, with occupancy to begin in Q420.

Sweet spot in a niche

The resilience of Treatt’s profits despite input cost deflation demonstrates how far the business has moved from its commoditised origins. Its key categories continue to be important drivers of both the top line and margin, but its other categories continue to grow, as witnessed by the natural fruit and vegetables category during H119. The company falls into a niche as it provides top-end innovation in beverages solutions, while also directly providing beverages ingredients. The majority of its products can be classified as natural or clean-label. Treatt’s portfolio is well-suited to the current consumer trends of clean labels and more natural, better-for-you products.

Valuation: Fair value 517p

Our DCF-derived fair value is 517p/share (previously 510p; we have rolled forward our DCF to commence in 2020), c 27% upside to the current share price. Our DCF is supported by Treatt’s benchmark valuation, with the shares trading at 22.4x FY19 P/E and 16.4x EV/EBITDA, representing a 21% and 12% discount to the ingredients peer group, respectively.

H119 results

H119 revenues were up 6% to £56.6m, profit before tax was up 7% on an adjusted basis to £6.2m, and adjusted EPS was down 2.7% to 8.35p (the fall is due to the 10% placing in December 2017 and the absence of a one-off US tax credit in the prior year). The key product categories of sugar reduction and tea both posted impressive sales growth, at 38% and 20%, respectively. Citrus – the largest key category – was down 2% in revenue terms due to the above-mentioned cyclical price weakness in some raw materials; however, profits in the category increased by 6%, in part due to favourable product mix. All product categories performed well, including the range of natural, fruit and vegetable extracts, which are used to give a fresh, authentic flavour in premium beverages. Sales of high-impact flavour chemicals outperformed management’s expectations during the period, and were up an impressive 18% vs the prior year.

During H119, the group continued to experience growth in key strategic markets, with US revenues up 3% at constant currency (the US now represents 38% of group revenue). China grew by 8% at constant currency as Treatt’s strategy gains traction, and now accounts for 6% of group revenue.

Net cash stood at £9.4m at the end of H119, and during H219 the business is likely to experience the usual seasonal cash inflow as working capital positions unwind. The cost of the UK relocation, however, will counter this. We currently forecast £22m of expenditure on these two projects in FY19, and we forecast year-end net debt of c £3m. Treatt holds a relatively high inventory position, but this helps it counter any sudden or seasonal fluctuations in its raw material costs. Its free cash flow yield stands at a healthy 5%.

Forecast revisions

We detail our key changes to P&L forecasts in Exhibit 1 below. Our sales forecasts move down by 2–4%, as we expect weakness in citrus pricing to weigh on Treatt’s selling prices. We expect this to be more of a H2 phenomenon in FY19 and hence have a greater impact in FY20. This has also caused an increase in our gross and operating margin assumptions, as we expect Treatt to improve its profitability on some older contracts, while maintaining its margins on the newer contracts (effectively passing on the cost benefit). This is in contrast to a commoditised business, whereby a reduction in raw material costs would likely result in an immediate reduction in prices, and at a constant margin it would cause a reduction in absolute profits. During H119 Treatt also witnessed a positive impact due to product mix in citrus, which also helped improve margins. We expect this to continue.

We note that citrus is Treatt’s historical area of expertise, and in its over 130-year history, the company has experienced many citrus pricing cycles, thus it should be well-placed to deal with the latest trends.

Our FY19EPS forecasts move as the remaining Kenyan assets are now loss-making following the Earthoil disposal. There has been a goodwill impairment to reflect this, and they are now being classified as assets held for sale as management has decided to dispose of them.

Exhibit 1: Old vs new key P&L forecasts

EPS (p)*

PBT* (£000s)

Revenue (£000s)

Old

New

% change

Old

New

% change

Old

New

% change

2019e

17.0

15.1

-11.1%

13,088

13,064

-0.2%

116,089

113,845

-1.9%

2020e

17.7

17.2

-3.0%

13,667

13,614

-0.4%

120,732

116,122

-3.8%

2021e

18.7

18.3

-2.2%

14,410

14,477

0.5%

125,562

120,767

-3.8%

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

Valuation

We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 2 below. Treatt trades at a discount to its peer group on both a P/E and an EV/EBITDA basis. We believe some discount is justified 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.

Exhibit 2: Comparative valuation

Market cap (m)

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

2019e

2020e

2019e

2020e

2019e

2020e

Givaudan

CHF24,355

29.4

27.1

20.6

19.1

2.4

2.5

IFF

$14,696

21.7

19.5

16.3

14.8

2.0

2.1

Symrise

CHF11,575

33.9

29.7

18.0

16.3

1.2

1.3

Chr Hansen

DKK91,429

46.9

41.6

30.8

27.7

1.5

1.8

Kerry

€17,561

25.6

23.5

18.5

17.2

0.8

0.9

Ingredion

$6,147

13.1

12.2

7.9

7.6

2.6

2.8

Peer group average

28.4

25.6

18.7

17.1

1.8

1.9

Treatt

£230.7

22.4

21.4

16.4

13.9

1.3

1.4

Premium/(discount) to peer group (%)

(21.1%)

(16.4%)

(12.3%)

(18.8%)

(28.5%)

(24.3%)

Source: Refinitiv, Edison Investment Research. Note: Prices as of 3 May 2019.

Our DCF-derived fair value is 517p (previously 510p). We have rolled over our DCF to commence in 2020, given we are more than halfway through 2019. Our longer-term sales growth forecast remains at 5.0% pa, falling to 2% growth in perpetuity. Our DCF is calculated based on a WACC of 6.9% (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%.

Exhibit 3: Financial summary

£000's

2016

2017

2018

2019e

2020e

2021e

Year end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

88,040

101,250

112,163

113,845

116,122

120,767

Cost of Sales

(67,639)

(75,985)

(84,407)

(86,015)

(87,270)

(90,520)

Gross Profit

20,401

25,265

27,756

27,831

28,852

30,248

EBITDA

 

 

11,604

15,049

16,627

15,654

18,429

19,366

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

 

 

10,257

13,650

15,108

13,977

14,835

15,695

Intangible Amortisation

(142)

(137)

(124)

0

0

0

Share based payments

(566)

(966)

(1,040)

(962)

(1,095)

(1,165)

Other

0

0

0

0

0

0

Operating Profit

9,549

12,547

13,944

13,015

13,739

14,531

Net Interest

(703)

(851)

(1,302)

50

(125)

(54)

Exceptionals

(553)

0

(1,105)

(825)

0

0

Profit Before Tax (norm)

 

 

9,554

12,799

13,806

14,026

14,710

15,641

Profit Before Tax (FRS 3)

 

 

8,293

11,696

11,537

12,239

13,614

14,477

Profit Before Tax (company)

 

 

8,846

11,696

12,642

13,064

13,614

14,477

Tax

(2,144)

(3,129)

(2,284)

(3,331)

(3,472)

(3,692)

Profit After Tax (norm)

7,410

9,670

11,522

10,695

11,238

11,950

Profit After Tax (FRS 3)

6,149

8,567

9,253

8,908

10,143

10,785

Discontinued operations

0

978

2,976

(1,800)

0

0

Average Number of Shares Outstanding (m)

51.9

52.2

56.8

59.1

59.1

59.1

EPS - normalised (p)

 

 

14.3

18.5

20.3

18.1

19.0

20.2

EPS - normalised & fully diluted (p)

 

 

14.1

17.9

19.8

17.9

18.8

20.0

EPS - (IFRS) (p)

 

 

11.8

16.4

21.5

15.1

17.2

18.3

Dividend per share (p)

4.4

4.8

5.1

5.1

5.8

6.2

Gross Margin (%)

23.2

25.0

24.7

24.4

24.8

25.0

EBITDA Margin (%)

13.2

14.9

14.8

13.8

15.9

16.0

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

11.7

13.5

13.5

12.3

12.8

13.0

BALANCE SHEET

Fixed Assets

 

 

16,161

19,532

21,863

42,888

54,036

48,677

Intangible Assets

3,364

3,331

752

752

752

752

Tangible Assets

11,361

14,821

20,038

41,063

52,211

46,852

Investments

1,436

1,380

1,073

1,073

1,073

1,073

Current Assets

 

 

54,435

68,230

102,401

101,782

102,262

104,577

Stocks

29,990

42,878

39,642

40,009

40,577

41,958

Debtors

17,853

19,973

28,828

29,033

29,381

30,315

Cash

6,588

4,748

32,304

32,304

32,304

32,304

Other

4

631

1,627

436

0

0

Current Liabilities

 

 

(16,388)

(27,003)

(35,781)

(39,897)

(42,504)

(34,941)

Creditors

(15,834)

(19,266)

(16,479)

(16,290)

(16,035)

(16,073)

Short term borrowings

(487)

(7,680)

(19,244)

(23,607)

(26,469)

(18,868)

Provisions

(67)

(57)

(58)

0

0

0

Long Term Liabilities

 

 

(17,021)

(14,281)

(6,858)

(16,460)

(17,691)

(13,691)

Long term borrowings

(7,755)

(7,293)

(3,001)

(11,803)

(13,234)

(9,434)

Other long term liabilities

(9,266)

(6,988)

(3,857)

(4,657)

(4,457)

(4,257)

Net Assets

 

 

37,187

46,478

81,625

88,312

96,102

104,622

CASH FLOW

Operating Cash Flow

 

 

10,804

4,683

3,580

15,050

17,057

16,889

Net Interest

(703)

(913)

(609)

50

(125)

(54)

Tax

(2,022)

(2,822)

(2,978)

(3,331)

(3,472)

(3,692)

Capex

(679)

(5,111)

(6,190)

(23,138)

(14,742)

1,688

Acquisitions/disposals

(861)

(1,667)

8,357

1,100

0

0

Financing

280

270

21,090

0

0

0

Dividends

(2,095)

(3,025)

(2,876)

(2,895)

(3,012)

(3,430)

Net Cash Flow

4,724

(8,585)

20,374

(13,165)

(4,293)

11,402

Opening net debt/(cash)

 

 

6,155

1,654

10,225

(10,059)

3,106

7,399

HP finance leases initiated

0

0

0

0

0

0

Other

(223)

14

(90)

0

0

0

Closing net debt/(cash)

 

 

1,654

10,225

(10,059)

3,106

7,399

(4,003)

Source: Treatt accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Treatt and prepared and issued by Edison, in consideration of a fee payable by Treatt. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

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This report has been commissioned by Treatt and prepared and issued by Edison, in consideration of a fee payable by Treatt. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

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