A more normal year

Treatt 4 December 2018 Update
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Treatt

A more normal year

FY18 results

Food & beverages

4 December 2018

Price

421.00p

Market cap

£246m

Net cash (£m) at 30 September 2018

10.1

Shares in issue

58.4m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.3)

(13.6)

(14.1)

Rel (local)

(6.3)

(7.4)

(10.6)

52-week high/low

508.0p

397.0p

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

Q3 trading update

March 2019

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 reported yet another set of strong results in FY18. The company remains in the sweet spot of current consumer trends, with ingredients that help to deliver better-for-you products with clean labels and without compromising on taste. The US expansion is on track and on budget, and will be fully operational in H119. The UK relocation is progressing well, although it is more complex and the timetable has slipped by about six months. FY19 has started well, and at this stage we leave our estimates broadly unchanged. Our DCF-derived fair value remains 510p.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/17

101.3

12.8

18.5

4.8

22.7

1.1

09/18

112.2

13.8

20.3

5.1

20.7

1.2

09/19e

116.1

14.2

19.1

5.1

22.0

1.2

09/20e

120.7

14.8

20.0

5.3

21.1

1.3

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

Expansion continues

The strong growth over the last few years caused a need for an expansion of capacity at Treatt’s US facility. The increase will be substantial, adding over 80% of prior capacity, and the project has so far been delivered on time and on budget, which is testament to management’s disciplined approach. The UK relocation is more significant and more complex. The design phase has taken longer than expected, hence the slippage in the timetable. We note the overall cost has crept up over time, but this is in part due to management’s decision rightly to hold back capital investment at the old facility, hence there is a degree of catch-up on the new facility.

Pricing pressure weighs on margins

Increased raw material costs and some pricing pressure on new business wins resulted in gross margins falling c 20bp in FY18. Adverse FX movements were also unhelpful. As expected, a large increase in working capital is attributable to timing issues and increased costs, but also to longer payment terms with a number of larger customers. Following the equity raise in November 2017, the balance sheet remains well-funded with a net cash position of £10.1m at end September 2018.

Valuation: fair value of 510p

We value Treatt using a DCF model, which indicates a fair value of 510p (unchanged). Treatt trades at 22.0 FY19e P/E and 16.9x FY19e EV/EBITDA. On P/E it trades at a c 20% discount to its peer group, and on EV/EBITDA it is at a c 5% discount.

FY results

FY18 results were broadly in line with our expectations. Following our slight downgrade in October with the pre-close trading update, our sales forecast was £110.5m and FY revenues came in slightly higher at £112.2m. Adjusted PBT was £12.6m, vs our £12.5m forecast, or 8% growth vs FY17. Adjusted EPS (on an IFRS basis)was up c 10% to 18.0p. We illustrate the slight changes to our P&L forecasts in Exhibit 1 below.

Exhibit 1: Old vs new key P&L forecasts

2018

2019e

2020e

Forecast

Actual

Diff

Old

New

Diff

Old

New

Diff

Revenue

110,545

112,163

1.5%

116,073

116,089

0.0%

120,715

120,732

0.0%

PBT*

12,479

12,642

1.3%

13,122

13,088

-0.3%

13,631

13,667

0.3%

Basic EPS*

15.7

18.0

14.5%

16.5

17.2

3.8%

17.2

17.9

4.4%

Source: Edison Investment Research. Note: *Stated on IFRS basis.

Valuation

We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit below. Treatt trades at a discount to its peer group on a P/E basis, and broadly in line on 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

CHF 22,477

29.3

26.1

20.2

17.8

2.5

2.6

IFF

$15,118

23.1

23.0

16.4

11.7

2.0

2.0

Symrise

CHF 9,316

33.2

28.9

17.3

15.7

1.3

1.4

Chr Hansen

DKK 77,229

39.6

35.0

25.9

23.3

0.3

0.3

Kerry

€ 15,709

25.6

23.2

18.2

16.7

0.8

0.8

Ingredion

$7,434

15.2

13.9

8.6

8.3

2.3

2.3

Peer group average

27.7

25.0

17.8

15.6

1.5

1.6

Treatt

239.0

22.0

21.1

16.9

14.3

1.2

1.3

Premium/(discount) to peer group (%)

(20.3%)

(15.7%)

(4.9%)

(8.5%)

(19.7%)

(20.2%)

Source: I/B/E/S (prices as of 27 November 2018).

Our DCF-derived fair value is unchanged at 510p as our forecast changes are minor. 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 6.8% (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

2015

2016

2017

2018

2019e

2020e

Year end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

85,934

88,040

101,250

112,163

116,089

120,732

Cost of Sales

(66,955)

(67,639)

(75,985)

(84,407)

(88,058)

(91,339)

Gross Profit

18,979

20,401

25,265

27,756

28,031

29,394

EBITDA

 

 

10,307

11,604

15,049

16,627

15,837

18,617

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

 

 

9,063

10,257

13,650

15,108

14,135

14,946

Intangible Amortisation

(175)

(142)

(137)

(124)

0

0

Share based payments

(198)

(566)

(966)

(1,040)

(1,096)

(1,144)

Other

0

0

0

0

0

0

Operating Profit

8,690

9,549

12,547

13,944

13,039

13,802

Net Interest

(740)

(703)

(851)

(1,302)

49

(135)

Exceptionals

(174)

(553)

0

(1,105)

0

0

Profit Before Tax (norm)

 

 

8,323

9,554

12,799

13,806

14,184

14,811

Profit Before Tax (FRS 3)

 

 

7,776

8,293

11,696

11,537

13,088

13,667

Profit Before Tax (company)

 

 

7,950

8,846

11,696

12,642

13,088

13,667

Tax

(1,786)

(2,144)

(3,129)

(2,284)

(3,337)

(3,485)

Profit After Tax (norm)

6,537

7,410

9,670

11,522

10,846

11,326

Profit After Tax (FRS 3)

5,990

6,149

8,567

9,253

9,750

10,182

Discontinued operations

2,976

Average Number of Shares Outstanding (m)

51.5

51.9

52.2

56.8

56.8

56.8

EPS - normalised (p)

 

 

12.7

14.3

18.5

20.3

19.1

20.0

EPS - normalised & fully diluted (p)

 

 

12.6

14.1

17.9

19.8

18.6

19.4

EPS - (IFRS) (p)

 

 

11.6

11.8

16.4

21.5

17.2

17.9

Dividend per share (p)

4.0

4.4

4.8

5.1

5.1

5.3

Gross Margin (%)

22.1

23.2

25.0

24.7

24.1

24.3

EBITDA Margin (%)

12.0

13.2

14.9

14.8

13.6

15.4

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

10.5

11.7

13.5

13.5

12.2

12.4

BALANCE SHEET

Fixed Assets

 

 

13,381

16,161

19,532

21,863

43,321

54,462

Intangible Assets

1,736

3,364

3,331

752

752

752

Tangible Assets

10,998

11,361

14,821

20,038

41,496

52,637

Investments

647

1,436

1,380

1,073

1,073

1,073

Current Assets

 

 

45,045

54,435

68,230

102,401

102,706

105,039

Stocks

25,799

29,990

42,878

39,642

40,797

42,188

Debtors

17,635

17,853

19,973

28,828

29,605

30,548

Cash

1,477

6,588

4,748

32,304

32,304

32,304

Other

134

4

631

1,627

0

0

Current Liabilities

 

 

(13,481)

(16,388)

(27,003)

(35,781)

(40,258)

(43,773)

Creditors

(12,675)

(15,834)

(19,266)

(16,479)

(16,611)

(16,672)

Short term borrowings

(567)

(487)

(7,680)

(19,244)

(23,647)

(27,101)

Provisions

(239)

(67)

(57)

(58)

0

0

Long Term Liabilities

 

 

(11,760)

(17,021)

(14,281)

(6,858)

(16,480)

(18,008)

Long term borrowings

(7,065)

(7,755)

(7,293)

(3,001)

(11,823)

(13,551)

Other long term liabilities

(4,695)

(9,266)

(6,988)

(3,857)

(4,657)

(4,457)

Net Assets

 

 

33,185

37,187

46,478

81,625

89,289

97,720

CASH FLOW

Operating Cash Flow

 

 

8,667

10,804

4,683

3,580

15,019

16,144

Net Interest

(740)

(703)

(913)

(609)

49

(135)

Tax

(1,469)

(2,022)

(2,822)

(2,978)

(3,337)

(3,485)

Capex

(924)

(679)

(5,111)

(6,190)

(23,161)

(14,811)

Acquisitions/disposals

(103)

(861)

(1,667)

8,357

1,100

0

Financing

147

280

270

21,090

0

0

Dividends

(1,978)

(2,095)

(3,025)

(2,876)

(2,895)

(2,895)

Net Cash Flow

3,600

4,724

(8,585)

20,374

(13,225)

(5,181)

Opening net debt/(cash)

 

 

9,584

6,155

1,654

10,225

(10,059)

3,166

HP finance leases initiated

0

0

0

0

0

0

Other

(171)

(223)

14

(90)

1

0

Closing net debt/(cash)

 

 

6,155

1,654

10,225

(10,059)

3,166

8,348

Source: Company data, 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.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “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.

Australia

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).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “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.

Australia

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).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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