Treatt |
A good start to the year |
H119 results |
Food & beverages |
7 May 2019 |
Share price performance
Business description
Next events
Analysts
Treatt is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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
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