Research - Treatt feature image - 03072019 - JPG

A great recipe

Treatt 6 January 2016 Outlook

Treatt

A great recipe

FY15 results

Food & beverages

6 January 2016

Price

167.50p

Market cap

£84m

Net debt (£m) at 30 September 2015

6.2

Shares in issue

51.7m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.0

1.5

23.2

Rel (local)

5.6

3.5

25.8

52-week high/low

169.5p

135.0p

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

AGM

29 January 2016

H116 results

17 May 2016

FY16 results

29 November 2016

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’s portfolio of natural, organic and fair-trade ingredients lies in the sweet spot of global food and beverage industry growth. Its strategy to deliver consistent growth by developing value-added ingredient solutions, coupled with strict cost control, is being achieved. Our DCF analysis calculates a 190p share price, 13% upside, supported by benchmark analysis showing the stock at a c 40% discount to its peer group.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/14

79.2

7.1

10.3

3.8

16.3

2.3

09/15

85.9

8.1

12.3

4.6

13.6

2.7

09/16e

85.9

8.5

12.4

4.7

13.5

2.8

09/17e

89.4

9.1

13.3

5.0

12.6

3.0

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

A successful year

Following a quiet start in Q1, Treatt has had yet another strong year. The new year has started steadily, and management is confident of building “a successful, strong business for the long term”. The good performance was broad based, spanning beverages, core flavours and fragrances and personal care. Cash-flow generation was strong and hence net debt now sits at a nine-year low, which will stand the business in good stead ahead of the relocation of the UK head office.

Ingredients space remains attractive

The ingredients subsector has outperformed the consumer staples space over recent years, particularly at the more value-added end. Growth remains higher than average for the sector as consumers demand cleaner labels and ‘better-for-you’ products, which require specialist ingredients. Margins are also typically high at the value-added end. Treatt’s ingredient solutions are used by both food ingredients companies in their formulations and by food and beverages companies directly. Treatt has particular emphasis in the beverages space, and indeed through FY15 has witnessed several new business wins in this space.

Valuation: Attractive ingredients play

Our DCF-derived fair value is 190p (previously 198p), an attractive c 15% upside to the current share price. This is supported by its benchmark valuation, with Treatt trading at 13.3x and 8.6x CY16 P/E and EV/EBITDA, representing a c 40% discount to its ingredients peer group on both metrics. Given our forecast of 3.8% three-year CAGR pre-exceptional EPS for 2015-18, we believe this level of discount is unwarranted.

Investment summary

Company description

Treatt provides high-quality innovative ingredient solutions to the flavours, fragrance and cosmetics industries, as well as directly to global fast-moving consumer goods (FMCG) manufacturers. Its in-depth knowledge of the commodities markets in which it operates (none exchange traded) and its long-term relationships with suppliers provide the group with an important competitive advantage. Treatt has more than 125 years of experience and knowledge of sourcing and trading raw materials, which acts as a barrier to entry for potential new entrants.

Valuation

Despite the share price having risen by 23% in absolute and 26% in relative (FTSE All-Share) terms over the last 12 months, it still trades at a significant discount to its peer group based on benchmark valuation metrics. We value Treatt on a DCF basis and derive fair value of 190p, or c 15% upside. We note that on a benchmark valuation basis, Treatt trades at a substantial (c 40%) discount to its ingredients peer group on both P/E and EV/EBITDA. This gap is unwarranted in our view.

Financials: Another strong year

The company had yet another strong year in FY15, despite the quiet start. The new year has started steadily, and management is confident of building “a successful, strong business for the long term”. We recognise that Q1 is always seasonally the smallest quarter, and hence expect any momentum built through FY15 to somewhat dampen at the start of FY16. New business wins are continuing, particularly in the beverages space, and we expect this trend to continue.

Looking into the medium term, we forecast 2.6% revenue CAGR and 4.9% pre-exceptional PBT CAGR, translating to 3.8% pre-exceptional earnings CAGR for 2015-18. Management’s proven track record in meeting or beating expectations, in combination with the positive outlook for the natural ingredients industry, gives us confidence that our forecasts will be met. In addition, we note that management has been successful in controlling costs through internal self-help measures, and we expect this trend to continue.

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 skills 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.

Contingent liability: Treatt is contesting a £2.3m claim against it related to deferred consideration on the earnout from the acquisition of Earthoil in 2007-08.


Company description

Treatt has more than 125 years’ experience as a supplier of innovative ingredient solutions to the flavour, fragrance and consumer goods industries. Its historic strength has been in ingredient sourcing and risk management, but over time it has invested in manufacturing its own higher value-added, higher-margin products. These now account for more than half of sales and three-quarters of group profits. Treatt’s main customers operate in the flavours and fragrance industries: its products are used by flavours and fragrances manufacturers and blended together to create highly value-added ingredients, which are in turn sold to fast-moving consumer goods (FMCG) companies. Treatt also sells directly to FMCG companies for use in their products.

Treatt’s customer base is broad reaching in terms of size and geographic reach and, while a key part of the new strategy is to focus on growing sales with a smaller number of larger customers, at present the breadth of its customer base means the group is not overly dependent on any one relationship, with its largest customer representing c 10% sales, and the top 10 customers representing c 35% sales. Approximately 75% of Treatt’s product portfolio is flavour ingredients, with approximately 25% fragrance ingredients. Typical end-products that use Treatt ingredients range from soft drinks, alcoholic beverages (mainly craft beers) and confectionery, to soaps, shampoos and basic pharmaceutical products. Treatt has manufacturing sites in the UK, US and Kenya, in which its three 100%-owned subsidiaries, RC Treatt, Treatt USA and Earthoil, are principally based. In addition to its manufacturing centres, Treatt has sales offices in China and France and a network of agents throughout the world, through which it exports to more than 90 countries worldwide.

Exhibit 1 and Exhibit 2 show a breakdown of revenue by geographic market and by customer sector.

Exhibit 1: Revenue by geography (FY15)

Exhibit 2: Revenue by customer sector (FY15)

Source: Treatt

Source: Treatt

Exhibit 1: Revenue by geography (FY15)

Source: Treatt

Exhibit 2: Revenue by customer sector (FY15)

Source: Treatt

In Exhibit 3 we illustrate Treatt’s product suite. Treatt used to be run along discrete product lines, but when CEO Daemmon Reeve took over in 2012 one of his key strategic priorities was to break down the ‘silo’ mentality that existed among the three operating units.

Exhibit 3: Treatt product suite

Value added

Products

Brand names

End-markets

Other points

Essential oils

Low-medium

Wide selection

Food, beverage,
fragrance

Natural and nature-identical blends, produced to customer specification, reduced allergen range.

Citrus

Medium

CitrustT

Food, beverage

Produced to customer specification.

TreattZest

Fragrance

From the Named Food (FTNF)

Treattarome

High

Wide selection

Treattarome (T)

Food and
beverage

From the Named Food (FTNF), proprietary manufacturing technology, double-digit growth, 50% gross margin.

Functional

Medium-high

TreattFusion

Beverage

True-to-type flavour characteristics.

CitreatT (T)

Wellness

Enhanced 'sweetener' profile.

MeritT

Fragrance

‘Plug and Play' fragrance ingredients.

Reduced allergen Specialties

Fragrance

Cost-effective solution to allergen and stability issues.

TreatSweet

Wellness

Non-caloric blends smooth out sweetness of high-intensity sweeteners.

Chemicals

Low

Aroma chemicals

Flavour and
fragrance

Repackage aroma chemicals, mostly for smaller customers.

Natural chemicals

Organic essential oils

Medium

Eartholate

Cosmetics and
fragrance

100% organically sourced.

Vegetable oils

Low

Range of fruit, vegetable, seed and nut oils.

Source: Company data, Edison Investment Research

Treatt has outgrown its current UK manufacturing facilities in Bury St Edmunds. In May 2015 the company announced its intention to fully relocate the UK business to another site near the existing one. The estimated cost is £15-20m, although the exact timing is still not known as the new site is part of a major strategic business development in the area and Treatt has not yet been able to purchase the land.

Industry overview

Natural, clean label, green, calorie-free and sustainability are the new buzzwords in today’s food and beverage industry. Products and ingredients bearing these tags have created demand among consumers, and have therefore been significant purchase influencers. The markets for these natural and naturally derived products are growing at a fast rate, creating significant profit potential for food and beverage manufacturers and ingredients suppliers alike.

Consumers perceive natural ingredients as having a positive impact on general health, while synthetic ingredients are viewed with suspicion. As a result, food and beverage manufacturers have promptly responded to the situation by completely replacing or partially replacing synthetic ingredients with their natural or clean-label counterparts. One example is the launch by the Coca-Cola Company of Coca-Cola Life, which is sweetened with cane sugar and stevia leaf extract and has 35% fewer calories than other leading colas. This followed Pepsi’s launch of Pepsi True in October 2014 (and Pepsi Next in some markets), which is also sweetened with stevia leaf extract.

Stevia is an increasingly popular 100% natural sweetener; however, it is also renowned for a signature bitter liquorice aftertaste. Treattaromes are Treatt’s trademark From the Named Food (FTNF) portfolio of clear aqueous distillates that naturally offset the aftertaste. They provide a natural sweet top-note flavour and are an exciting potential way for Treatt to participate in this fast-growing sector of the beverage market.

With the sale of natural food and beverages predicted to reach US$39.1bn in 2015 (source: Prepared Foods 2013), the size of the market opportunity for Treatt is enormous relative to its current size and position. In addition, we highlight that Treatt is in an excellent position to benefit from the constant need for FMCG manufacturers to produce a stream of new product formulations to keep consumers engaged. It is also well placed to capitalise on the natural and clean-label trends given its expertise in FTNF solutions. In the short term, we highlight that capacity constraints in the UK, and in the medium term in the US, are limiting factors in the group’s ability to take full advantage of its expertise; however, payback on any future capacity investment, both in terms of percentage return and the time taken to achieve it, is likely to look attractive.

An attractive proposition

Flavours and fragrances span a very wide range of products and applications. We outline below the factors that we believe make Treatt an attractive business:

A constantly expanding portfolio of innovative ingredient solutions, of which the extensive Treattarome and Citreatt ranges are registered trademarks. With over 80% of natural flavours globally finding applications in the beverage industry (source: Foodtrending.com), Treatt is actively increasing its exposure to the beverage market, with c 60% of revenues now from the beverage industry (this includes ingredients sold to Flavours & Fragrances customers, which are ultimately then sold on to beverage customers). Its Treattarome, TreattFusion and TreattZest FTNF ranges of clear aqueous distillates are ideal for application in the beverage sector, and as a result in 2015 Treatt has benefited from some encouraging new business wins in large-cap FMCG.

Treatt’s renowned natural and organic credentials and FTNF ingredients are very much in line with the current trend for clean labelling: c 25% of product launches globally in 2014 (or c 59,000 launches ) were positioned as clean label (source: Tate & Lyle 2014 report and accounts). In addition, its long-term relationships with growers and farmers worldwide (some dating back more than 20 years) ensure the traceability and sustainability of its products, as well as reflecting its commitment to fair trade. Its continued success in this field is shown by a number of both accreditations (Fair for Life, Soil Association Organic Standards, USDA Organic Standards) and affiliations to international trade associations (International Organisation of the Flavour Industry and Brewing, Food and Beverage Industry Suppliers Association).

Its origins as a raw material supplier to the global flavours, fragrance and cosmetics industry mean that Treatt benefits from a vertically integrated supply chain, which safeguards the efficacy of its raw materials sources. More importantly, however, it also ensures the consistency and reliability of supply to customers through periods of commodity price hikes, or raw material shortage due to the longstanding relationships it has with its suppliers. It is also increasingly enabling the use of long-term contacts with both suppliers and customers, to mitigate commodity price risk and reduce gross margin volatility.

Treatt’s manufacturing processes ensure a consistent flavour profile, evening out variations found in naturally sourced ingredients, an essential attribute for its end-customers (especially FMCG manufacturers) due to the importance of consistency in the flavour of the end-product demanded by its consumers. While natural flavours might seem like an easy solution to current market trends, perhaps somewhat counterintuitively they are also complex, containing hundreds or more volatile constituents from which it is difficult to create a consistent flavour profile, compared to their far more stable synthetic counterparts.

Treatt has the ability to supply a broad range of flavour and fragrance ingredients in any size anywhere in the world. This has historically formed a point of differentiation between the company and its larger multinational competitors, which often have stricter policies on minimum quantity and standardised packaging. However, while this capability will still exist, it will be more strictly applied where an existing profitable relationship exists with a client, or where the provision of a broad range of ingredients may be built into a profitable relationship.

The group is proactive in meeting the challenges of the ever-changing regulatory landscape, not only ensuring consistent compliance with industry standards (resulting in an accreditation from the Global Food Safety Initiative), but also using its expertise as a value-added service to its global customer base. The ever-increasing level of regulation in the industry serves as an additional barrier to entry to potential new competitors. As illustrated in Exhibit 1 Treatt’s geographical exposure is diverse. The US is its single largest market, accounting for c 30% of sales, followed by the UK at c 15%. Treatt is investing in the US business by enhancing its technical facilities, and is relocating the UK business to provide it with necessary investment for future growth. China is still relatively small at 6%, but management believes it represents a significant growth opportunity. Treatt is therefore moving to larger premises in China over the next few weeks to establish an application and sample lab, and hence improve its capabilities and effectiveness in a very competitive but potentially exciting market.

Strategy

The group updated its strategy in H215 as the business has evolved. The previous strategic priorities have now been embedded into the business, and the group now has five key pillars to support a focused sales approach, and thus lead to long term, sustainable profit growth:

Meeting customer needs: the flavours and fragrances and ingredient solutions arena is increasingly dynamic and competitive as customers seek to differentiate their products with ever-more sophisticated formulations to win over the consumer. Treatt has a very good reputation in the market and its deep-rooted expertise ensures customers consistently receive quality products.

Solutions in many forms: Treatt is increasingly collaborating ever more closely with its customers by deploying its highly skilled experts to assist its customers. This allows both parties to be at the forefront of flavour innovation and development, and helps cement deep trust. In turn, this increases the likelihood of customers using Treatt as the ‘go-to’ supplier, rather than shopping around. Not all ingredient solutions, however, are necessarily highly innovative, and Treatt continues to operate its traditional ingredients business, though it is increasingly focused and streamlined to avoid unprofitable client relationships.

Differential advantage: Treatt’s highly skilled experts are key to its competitive edge. The experts are deployed to the customers and also travel with the sales team to maximise customer engagement. To this end, sales are seen as every employee’s responsibility and not just a separate company department.

Customer intimacy: this has become a key area of focus to understand customers better and hence deliver superior and more profitable solutions. This in turn should ensure customers deem Treatt to be their first choice supplier.

Culture: the CEO, Daemonn Reeve, is committed to cultural change, and more specifically a culture of empowerment to champion a can-do attitude. Treatt recognises that a happy, well-motivated and experienced workforce will be more successful. The drive for cultural change started as soon as the current CEO took the helm in 2012, and the business now operates on an increasingly global platform.

Combined, all the individual strategies outlined above help to contribute to the final strategy objective, that of consistent, sustainable growth in profit. While in the short term gross margins can fluctuate due to cyclical changes in raw material costs (specifically citrus oils), in the longer term the evolution of the portfolio towards higher-margin, higher value-added ingredient solutions means that management views gross margin of 27% (versus our FY16e 22.4%) as plausible over the medium term. Equally, management commitment to contain fixed costs is clear; as such management views an EBIT margin in the low teens as achievable in the long term, versus our forecast for FY16 of 10.6%.

While M&A could prove to be a value-added opportunity in the medium to long term, in the near term management believes that enough opportunity exists in executing on its organic strategy, without the inevitable distraction of exploring external opportunities. In addition, the relocation of the UK head office and manufacturing site is likely to use much of the available financial as well as management resource over the next couple of years.

Sensitivities

Commodity exposure

Due to its background as a trader in raw material ingredients and the breath of the product range it offers to customers, Treatt is exposed to a wide range of commodities. In general, this means that fluctuations in commodity prices tend to even out across the portfolio, as a ‘natural hedge’; however, the exception to this is the group’s sizeable exposure to citrus oils, namely orange and lemon oils.

Citrus oils

Orange oil is a non-exchange traded commodity, so its supply is managed by Treatt’s highly skilled stock teams in the US and UK, with their deep market knowledge and expertise adding value to customers by consistently ensuring best prices and consistency of supply.

95% of Treatt’s supply of orange oil comes from two key markets – Brazil and Florida – yet both markets have been negatively affected in recent years by disease and adverse weather patterns that have reduced both quantities of oranges grown and the quality of the overall crop. Orange oil is a by-product of orange juice, extracted through the process of centrifugation. Despite being a by-product, there is no direct relationship between the price of orange oil and the publicly traded price of orange juice. This is because the key determinant of price is not simply the quantity of fruit grown in any one growing season, but rather the complex interaction of a number of influences, driven in the main by the amount of fruit that the processors need to buy to produce the quantities of juice they need to satisfy demand. The current influences on the price of orange oil are:

The United States Department of Agriculture (USDA) revised its orange crop forecast down by another 8% for Florida production.

The Brazilian crop was lower than expected and there was also a yield reduction (due to the lower quality of crop)

These two factors have sent the orange oil market into a frenzy, with prices heading towards the elevated levels of 2010-11, when prices reached $10/kg (vs the long-term average of $2-3/kg) due to the heightened demand for orange terpenes in the clean-up process following BP’s oil spill in the Gulf of Mexico. Management is expecting citrus oil prices to soften through FY16.

The lemon oil market, on the other hand, is stabilising. Supply is improving and the expectation is that the crop from the main markets of Spain and Italy is stable vis-à-vis last year, and hence pricing should not see a major fluctuation.

The group’s deep insight into the markets of both commodities has very clearly helped it navigate the worst of the volatility, but also provides a significant value-added service to customers who may not have a similar level of insight. Increasingly, Treatt is looking to secure longer-term contracts from both customers and suppliers to smooth out volatility in raw material procurement and revenues, thus hoping to reduce volatility in group gross margin.

Foreign exchange

The principal foreign exchange risk is sterling/US dollar, which affects the company from both a transactional and a translational point of view:

Transactional: raw materials (including orange oil) are mainly purchased in US dollars, thus affecting the cash values of sales and the gross margin if subsequently sold in a different currency. Movements in the US dollar can also affect the replacement cost of stock, which can and does have an impact on profitability as well as competitiveness.

Translational: sales are made to more than 90 countries, thus fluctuation in the sterling exchange rate can affect reported revenues, gross profit and operating costs.

To try to mitigate the main sterling/US dollar exposure, Treatt has a policy of maintaining the majority of its cash balances – including group overdraft facilities – in US dollars, and to a lesser extent in euros, as this is a cost-effective way of providing a natural hedge. In addition, the company takes out forward FX contracts to hedge the risk.

For the full year to September 2015, we calculate that on average the US dollar weakened by 6.9% against sterling. However, due to the hedging activity undertaken by the company in 2014, the full-year foreign exchange impact on group results is expected to be negligible.

Contingent liabilities

The vendors of the Earthoil group (purchased by Treatt in 2007-08) have filed a claim in the Chancery Division of the High Court against the company, originally for £1.8m, which they subsequently increased to £2.3m in H114. The claim relates to an earnout, being deferred consideration payable to the vendors in respect of the acquisition. The court found in favour of Treatt in two rulings and one in favour of the vendors. The matter was referred to chartered accountants for the determination of the substantive claim in February. The outcome is expected in H116. Treatt’s board remains of the view that no sums are due to the sellers in respect of this claim.

New UK headquarters

Treatt has outgrown its current UK manufacturing facilities in Bury St Edmunds and had been exploring options for some time. In May 2015 the company announced its intention to fully relocate the UK business to another site near the existing one. The estimated cost is £15-20m, although the exact timing is still unknown as the new site is part of a major strategic business development in the area and Treatt has not yet been able to purchase the land. We previously expected building of the new site to start in 2016, but given the land has not yet been purchased we now expect this to be the main focus for 2016 and for building to start in 2017. We have adjusted our forecasts accordingly and now estimate relocation costs of £3.5m in FY16, £10m in FY17 and £6.5m in FY18.

Valuation

We illustrate Treatt’s valuation versus its ingredients peer group below. Treatt trades at a significant discount to its peer group on all metrics. While some discount can be applied given its small size and some of its products are relatively ‘upstream’ in the ingredients spectrum – in particular the bulk ingredients that are sold to other ingredients companies – and hence would command a lower multiple, we believe a 40% discount on EV/EBITDA and P/E is unwarranted.

Exhibit 4: Benchmark valuation

Market cap

PE (x)

EV/EBITDA (x)

Dividend yield (%)

(m)

2015e

2016e

2015e

2016e

2015e

2016e

Givaudan

CHF 16,325

25.1

23.3

15.9

15.1

3.1%

3.3%

IFF

$9,448

21.7

20.5

14.6

13.6

1.7%

1.9%

Symrise

CHF 8,496

27.8

24.7

15.6

14.2

1.5%

1.8%

Frutarom

ILS 11,909

30.2

22.4

19.6

15.8

0.6%

0.7%

Chr Hansen

DKK 55,932

39.7

35.2

25.1

22.4

1.2%

1.6%

Kerry

€ 13,165

25.1

22.5

18.5

16.4

0.7%

0.7%

Ingredion

$6,640

15.9

14.5

9.0

8.3

1.9%

2.0%

Peer group average

26.5

23.3

16.9

15.1

1.5%

1.7%

Treatt

£86.3

13.6

13.3

9.1

8.6

2.8%

2.8%

Premium/(discount) to peer group

-48.8%

-43.1%

-46.4%

-43.3%

80.9%

64.5%

Source: Bloomberg. Note: Treatt figures are calendarised to aid comparison. Prices as at 4 January 2016.

Our DCF-derived fair value is 190p (previously 198p) following the various changes to our model. This is predicated on a WACC of 7.9% (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%.

Below, we show a sensitivity analysis to these assumptions and note that the current share price is implying a terminal EBIT margin of 11% and a terminal growth rate of c 1%.

Exhibit 5: DCF sensitivity to terminal growth rate and EBIT margin

Terminal growth

EBIT margin

10.5%

11.0%

11.5%

12.0%

12.5%

-1.0%

134

138

143

148

152

0.0%

144

149

155

160

165

1.0%

157

163

170

176

182

2.0%

175

183

190

197

204

3.0%

200

209

218

227

236

4.0%

239

250

261

272

284

Source: Edison Investment Research estimates

Financials

FY15 sales grew by an impressive 9%. The beverages market in particular is proving a source of growth for Treatt. Craft beer is one of the fastest growing sub-segments in the beverages market and is proving to be a successful market for the company. Moreover, the reduced-calorie/diet segment is also providing growth as consumers (and hence manufacturers) become more interested in natural products and shy away from artificial flavourings and sweeteners. Profits were held back in H1 by adverse raw material price movements relating to some longer-term, fixed-price contracts and by the timing of FX hedges. The latter unwound as forecast in H2. Net debt was considerably better than forecast. We illustrate the actual FY results compared with our forecasts in 6 below.

Exhibit 6: Actual vs forecast results FY15

£000s

Actual

Edison

Performance +/-

FY14

Growth vs
previous year (%)

Revenues

85,934

86,316

-0.4%

79,189

8.5

EBITDA

10,109

10,086

0.2%

9,022

12.0

Operating profit

8,690

8,487

2.4%

7,628

13.9

Margin

10.1%

9.8%

30bp

9.6%

190bp

PBT (pre-exceptional)

7,950

7,781

2.2%

6,904

15.2

EPS (FD pre-exceptional), p

11.9

11.3

4.9%

9.9

19.6

Net debt

6,155

7,496

17.9%

9,584

(35.8)

Source: Edison Investment Research, company data. Note: PBT and EPS both adjusted as per company definition.

Forecast changes

We have trimmed our FY16 sales forecast to reflect the slightly lower than expected sales figure reported for FY15. We have left our sales growth assumption of 0% unchanged. We also reduce our EBITDA very slightly given the currently high orange oil prices. A better than expected net debt figure for FY15 results in a small upgrade at interest level and hence our PBT and EPS are broadly unchanged, as illustrated in Exhibit 6 below.

Exhibit 7: Forecast changes for key P&L metrics FY16

£000s

Old

New

Difference (%)

Revenue

86,316

85,934

(0.4)

EBITDA

10,690

10,574

(1.1)

PBT (pre-exceptional)

8,308

8,337

0.3

EPS (pre-exceptional), p

12.1

12.1

0.3

Source: Edison Investment Research. Note: PBT and EPS both adjusted as per company definition.

We have adjusted our forecasts following the news on the UK business relocation. Previously we forecast £7m in FY16, £10m in FY17 and £3m in FY18 in respect of the move, but we believe there may be a delay given formal negotiations to purchase the land have not yet started, and hence we now forecast £3.5m in FY16, £10m in FY17 and £6.5m in FY18.

Exhibit 8: Financial summary

£000's

2013

2014

2015

2016e

2017e

2018e

Year end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

74,097

79,189

85,934

85,934

89,371

92,946

Cost of Sales

(56,510)

(61,218)

(66,955)

(66,654)

(68,874)

(71,536)

Gross Profit

17,587

17,971

18,979

19,280

20,498

21,411

EBITDA

 

 

8,338

9,022

10,109

10,574

11,526

12,167

Operating Profit (before amort. and except.)

 

 

7,119

7,800

8,865

9,142

10,037

10,618

Intangible Amortisation

(181)

(172)

(175)

(160)

(160)

(160)

Exceptionals

(1,153)

(1,402)

(174)

0

0

0

Other

0

0

0

0

0

0

Operating Profit

5,785

6,226

8,516

8,982

9,877

10,458

Net Interest

(651)

(724)

(740)

(645)

(900)

(1,316)

Profit Before Tax (norm)

 

 

6,468

7,076

8,125

8,497

9,137

9,302

Profit Before Tax (FRS 3)

 

 

5,134

5,502

7,776

8,337

8,977

9,142

Tax

(1,655)

(1,553)

(1,786)

(2,084)

(2,244)

(2,285)

Profit After Tax (norm)

4,813

5,280

6,341

6,416

6,896

7,020

Profit After Tax (FRS 3)

3,479

3,949

5,990

6,253

6,732

6,856

Average Number of Shares Outstanding (m)

51.1

51.3

51.5

51.7

51.7

51.7

EPS - normalised (p)

 

 

9.4

10.3

12.3

12.4

13.3

13.6

EPS - normalised & fully diluted (p)

 

 

9.4

10.2

12.2

12.4

13.3

13.5

EPS - (IFRS) (p)

 

 

6.8

7.7

11.6

12.1

13.0

13.3

Dividend per share (p)

3.7

3.8

4.6

4.7

5.0

5.1

Gross Margin (%)

23.7

22.7

22.1

22.4

22.9

23.0

EBITDA Margin (%)

11.3

11.4

11.8

12.3

12.9

13.1

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

9.6

9.8

10.3

10.6

11.2

11.4

BALANCE SHEET

Fixed Assets

 

 

14,341

13,777

13,381

16,578

26,269

32,454

Intangible Assets

1,759

1,801

1,736

1,576

1,416

1,256

Tangible Assets

11,718

10,994

10,998

14,355

24,206

30,551

Investments

864

982

647

647

647

647

Current Assets

 

 

38,340

43,590

45,045

44,775

46,903

49,131

Stocks

23,669

28,020

25,799

26,640

28,063

29,557

Debtors

13,207

14,509

17,635

17,635

18,340

19,074

Cash

1,117

629

1,477

500

500

500

Other

347

432

134

0

0

0

Current Liabilities

 

 

(12,533)

(16,005)

(13,481)

(15,863)

(21,155)

(24,222)

Creditors

(11,962)

(12,729)

(12,675)

(11,812)

(12,285)

(12,776)

Short term borrowings

(522)

(2,356)

(567)

(4,051)

(8,870)

(11,446)

Provisions

(49)

(920)

(239)

0

0

0

Long Term Liabilities

 

 

(12,754)

(12,602)

(11,760)

(6,821)

(9,031)

(10,119)

Long term borrowings

(8,889)

(7,857)

(7,065)

(2,025)

(4,435)

(5,723)

Other long term liabilities

(3,865)

(4,745)

(4,695)

(4,796)

(4,596)

(4,396)

Net Assets

 

 

27,394

28,760

33,185

38,668

42,986

47,243

CASH FLOW

Operating Cash Flow

 

 

9,250

3,528

8,667

10,461

9,670

10,230

Net Interest

(714)

(724)

(740)

(645)

(900)

(1,316)

Tax

(649)

(1,552)

(1,469)

(2,084)

(2,244)

(2,285)

Capex

(1,433)

(538)

(924)

(4,789)

(11,341)

(7,894)

Acquisitions/disposals

(154)

(208)

(103)

0

0

0

Financing

(56)

105

147

0

0

0

Dividends

(1,585)

(1,899)

(1,978)

(2,363)

(2,414)

(2,599)

Net Cash Flow

4,659

(1,288)

3,600

579

(7,229)

(3,865)

Opening net debt/(cash)

 

 

12,949

8,294

9,584

6,155

5,576

12,805

HP finance leases initiated

0

0

0

0

0

0

Other

(4)

(2)

(171)

0

0

0

Closing net debt/(cash)

 

 

8,294

9,584

6,155

5,576

12,805

16,669

Source: company accounts, Edison Investment Research

Contact details

Revenue by geography (FY15)

Northern Way
Bury St Edmunds
IP32 6NL
UK
+44 (0)1284 702500
www.treatt.com

Contact details

Northern Way
Bury St Edmunds
IP32 6NL
UK
+44 (0)1284 702500
www.treatt.com

Revenue by geography (FY15)

Management team

CEO: Daemmon Reeve

CFO: Richard Hope

Daemmon Reeve has extensive industry experience and knowledge, having worked at RC Treatt in the UK from 1991-2010, gaining widespread experience across technical, operational, and sales and purchasing disciplines. In July 2010, he was appointed CEO of Treatt USA and CEO of the group in July 2012, filling Hugo Bovill’s position after he stepped down.

Richard Hope was appointed group finance director in May 2003, having been head of finance at Hampshire Cosmetics between 1996 and 2003. He is a qualified chartered accountant.

Management team

CEO: Daemmon Reeve

Daemmon Reeve has extensive industry experience and knowledge, having worked at RC Treatt in the UK from 1991-2010, gaining widespread experience across technical, operational, and sales and purchasing disciplines. In July 2010, he was appointed CEO of Treatt USA and CEO of the group in July 2012, filling Hugo Bovill’s position after he stepped down.

CFO: Richard Hope

Richard Hope was appointed group finance director in May 2003, having been head of finance at Hampshire Cosmetics between 1996 and 2003. He is a qualified chartered accountant.

Principal shareholders

(%)

Schroders Investment Management

17.45

Discretionary Unit Fund Managers

15.29

Milton Asset Management

6.48

Barclays

3.42

Hargreave Hale

3.34

Allianz Global Investors

3.22

Henderson Global Investors

2.97

Companies named in this report

IFF (IFF), Givaudan (GIVN:VX), Symrise (SY1:GR), Christian Hansen (CHR:DC), Kerry (KYGa.L), Sensient (SXT) Coca Cola (KO) Frutarom (FRUT:IT), Ingredion (INGR), PepsiCo (PEP)

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). 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 2016 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 2016. “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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Share this with friends and colleagues