Another positive half

Treatt 5 April 2019 Update
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Treatt

Another positive half

H1 trading update

Food & beverages

5 April 2019

Price

388p

Market cap

£223m

Net cash (£m) at 30 September 2018

10.1

Shares in issue

57.5m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(8.2)

(12.1)

(4.4)

Rel (local)

(11.0)

(18.9)

(8.5)

52-week high/low

508.0p

388.0p

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

H119 results

7 May 2019

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

The last few years have seen Treatt grow at a spectacular rate, and although – as expected – the growth has moderated, it demonstrates that momentum persists in the business, and management has continued to build on prior growth despite the demanding comparatives. Revenues were up by 7% in H119, or 5% at constant currency, vs revenues up 10% in H118. The key categories of fruit and vegetables, tea and sugar-reduction continue to drive the business. Citrus remains the largest category, though at present it is witnessing some weakness due to lower raw material prices. Nevertheless, the rest of the business continues to grow, and management’s outlook for FY19 remains unchanged.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/17

101.3

12.8

18.5

4.8

20.9

1.2

09/18

112.2

13.8

20.3

5.1

19.1

1.3

09/19e

116.1

14.2

18.8

5.1

20.6

1.3

09/20e

120.7

14.8

19.7

5.3

19.7

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

A key part of Treatt’s current strategy is to expand its capacity in order to satisfy increasing demand for its products. The expansion of its US facility was completed in March, on budget and on schedule, and is due to become fully operational by June 2019. The UK relocation project – which is more complex – was delayed by around six months compared to the original schedule as the design phase took longer than expected, but now remains on track for construction to begin during Q4 of FY19 (Q419) and occupancy to begin in Q420.

Treatt remains in the sweet spot

As expected, revenue growth has moderated over the past 18 months, as FY17 witnessed exceptional growth of 24.5%. Underlying revenue growth of 5% in H119 is more sustainable and demonstrates that the company is successfully embracing the sweet spot in flavour ingredients. Its portfolio is well-suited for the current consumer trends of clean labels and more natural, better-for-you products, without compromising on taste. The fact that organic revenue growth of 5% was achieved, despite pressure on citrus pricing due to raw materials weakness, demonstrates the strength of Treatt’s portfolio.

Valuation: Attractive ingredients play

We value Treatt using a DCF model, which indicates a fair value of 510p (unchanged). Treatt trades at 19.7x FY20e P/E and 13.4x FY20e EV/EBITDA. On both P/E and EV/EBITDA it trades at a c 20% discount to its peer group. We note that although hedging is in place to mitigate any FX impact on the P&L, in the shorter term the weakening dollar will lead to a negative FX impact on the H1 results.

Valuation

We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 1 below. Treatt trades at a discount to its peer group on both a P/E and 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 1: Comparative valuation

Market cap (m)

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

2019e

2020e

2019e

2020e

2019e

2020e

Givaudan

CHF 22,931

27.5

25.4

19.4

18.1

2.5

2.7

IFF

$14,061

20.8

18.7

15.7

14.3

2.1

2.2

Symrise

CHF 11,100

32.5

28.3

17.6

15.8

1.2

1.4

Chr Hansen

DKK 84,296

43.4

38.4

28.6

25.7

1.7

1.9

Kerry

€ 17,082

24.8

22.8

18.1

16.8

0.8

0.9

Ingredion

$6,286

13.3

12.4

8.1

7.7

2.6

2.7

Peer group average

27.0

24.3

17.9

16.4

1.8

2.0

Treatt

223.1

20.6

19.7

15.8

13.4

1.3

1.4

Premium/(discount) to peer group (%)

(23.9%)

(19.0%)

(11.6%)

(18.6%)

(27.6%)

(29.8%)

Source: Refinitiv, Edison Investment Research. Note: Prices as of 4 April 2019.

Our DCF-derived fair value is unchanged at 510p as our forecasts are unchanged. 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 2: Financial summary

£000s

2016

2017

2018

2019e

2020e

2021e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

88,040

101,250

112,163

116,089

120,732

125,562

Cost of Sales

(67,639)

(75,985)

(84,407)

(88,058)

(91,339)

(94,867)

Gross Profit

20,401

25,265

27,756

28,031

29,394

30,695

EBITDA

 

 

11,604

15,049

16,627

15,837

18,617

19,437

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

 

 

10,257

13,650

15,108

14,135

14,946

15,686

Intangible Amortisation

(142)

(137)

(124)

0

0

0

Share based payments

(566)

(966)

(1,040)

(1,096)

(1,144)

(1,207)

Other

0

0

0

0

0

0

Operating Profit

9,549

12,547

13,944

13,039

13,802

14,480

Net Interest

(703)

(851)

(1,302)

49

(135)

(70)

Exceptionals

(553)

0

(1,105)

0

0

0

Profit Before Tax (norm)

 

 

9,554

12,799

13,806

14,184

14,811

15,616

Profit Before Tax (FRS 3)

 

 

8,293

11,696

11,537

13,088

13,667

14,410

Profit Before Tax (company)

 

 

8,846

11,696

12,642

13,088

13,667

14,410

Tax

(2,144)

(3,129)

(2,284)

(3,337)

(3,485)

(3,675)

Profit After Tax (norm)

7,410

9,670

11,522

10,846

11,326

11,942

Profit After Tax (FRS 3)

6,149

8,567

9,253

9,750

10,182

10,735

Discontinued operations

2,976

Average Number of Shares Outstanding (m)

51.9

52.2

56.8

57.5

57.5

57.5

EPS - normalised (p)

 

 

14.3

18.5

20.3

18.8

19.7

20.7

EPS - normalised & fully diluted (p)

 

 

14.1

17.9

19.8

18.6

19.4

20.5

EPS - (IFRS) (p)

 

 

11.8

16.4

21.5

17.0

17.7

18.7

Dividend per share (p)

51.9

52.2

56.8

57.5

57.5

57.5

Gross Margin (%)

23.2

25.0

24.7

24.1

24.3

24.4

EBITDA Margin (%)

13.2

14.9

14.8

13.6

15.4

15.5

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

11.7

13.5

13.5

12.2

12.4

12.5

BALANCE SHEET

Fixed Assets

 

 

16,161

19,532

21,863

43,321

54,462

49,094

Intangible Assets

3,364

3,331

752

752

752

752

Tangible Assets

11,361

14,821

20,038

41,496

52,637

47,269

Investments

1,436

1,380

1,073

1,073

1,073

1,073

Current Assets

 

 

54,435

68,230

102,401

102,706

105,039

107,446

Stocks

29,990

42,878

39,642

40,797

42,188

43,624

Debtors

17,853

19,973

28,828

29,605

30,548

31,518

Cash

6,588

4,748

32,304

32,304

32,304

32,304

Other

4

631

1,627

0

0

0

Current Liabilities

 

 

(16,388)

(27,003)

(35,781)

(40,268)

(43,818)

(36,081)

Creditors

(15,834)

(19,266)

(16,479)

(16,611)

(16,672)

(16,711)

Short term borrowings

(487)

(7,680)

(19,244)

(23,656)

(27,146)

(19,370)

Provisions

(67)

(57)

(58)

0

0

0

Long Term Liabilities

 

 

(17,021)

(14,281)

(6,858)

(16,485)

(18,030)

(13,942)

Long term borrowings

(7,755)

(7,293)

(3,001)

(11,828)

(13,573)

(9,685)

Other long term liabilities

(9,266)

(6,988)

(3,857)

(4,657)

(4,457)

(4,257)

Net Assets

 

 

37,187

46,478

81,625

89,275

97,654

106,518

CASH FLOW

Operating Cash Flow

 

 

10,804

4,683

3,580

15,004

16,130

16,854

Net Interest

(703)

(913)

(609)

49

(135)

(70)

Tax

(2,022)

(2,822)

(2,978)

(3,337)

(3,485)

(3,675)

Capex

(679)

(5,111)

(6,190)

(23,161)

(14,811)

1,617

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)

(2,933)

(3,062)

Net Cash Flow

4,724

(8,585)

20,374

(13,240)

(5,234)

11,664

Opening net debt/(cash)

 

 

6,155

1,654

10,225

(10,059)

3,180

8,414

HP finance leases initiated

0

0

0

0

0

0

Other

(223)

14

(90)

1

0

0

Closing net debt/(cash)

 

 

1,654

10,225

(10,059)

3,180

8,414

(3,249)

Source: Edison Investment Research, Treatt data

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 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.

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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 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.

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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