Treatt — Another solid performance

Treatt (LSE: TET)

Last close As at 25/04/2024

420.00

2.00 (0.48%)

Market capitalisation

257m

More on this equity

Research: Consumer

Treatt — Another solid performance

Treatt has had another successful year, and the COVID-19 pandemic so far has not materially affected trading performance. The sharp fall in citrus prices has had an impact on revenue growth, which is down 3% at constant currency for FY20. However, profit performance was strong as there was good growth in the other parts of the business, with health & wellness and fruit & vegetables posting double-digit revenue growth, and with the higher-margin parts of the business continuing to outperform. The UK relocation project continues, with construction nearing completion and a move to the new site expected in spring 2021, and the outlook for FY21 is cautiously optimistic. Our fair value increases to 670p (from 560p).

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Consumer

Treatt

Another solid performance

FY trading statement

Food & beverages

9 October 2020

Price

586.0p

Market cap

£347m

Net cash (£m) at 30 September 2020

1.0

Shares in issue

59.4m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.3)

17.5

38.5

Rel (local)

(4.3)

19.4

61.7

52-week high/low

638.0p

310.0p

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

FY20 results

24 November 2020

Analysts

Sara Welford

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

is a research client of Edison Investment Research Limited

Treatt has had another successful year, and the COVID-19 pandemic so far has not materially affected trading performance. The sharp fall in citrus prices has had an impact on revenue growth, which is down 3% at constant currency for FY20. However, profit performance was strong as there was good growth in the other parts of the business, with health & wellness and fruit & vegetables posting double-digit revenue growth, and with the higher-margin parts of the business continuing to outperform. The UK relocation project continues, with construction nearing completion and a move to the new site expected in spring 2021, and the outlook for FY21 is cautiously optimistic. Our fair value increases to 670p (from 560p).

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/18

112.2

13.8

20.3

5.1

28.9

0.9

09/19

112.7

14.0

19.2

5.5

30.5

0.9

09/20e

109.3

14.7

18.9

5.8

31.0

1.0

09/21e

114.8

15.8

20.3

6.2

28.9

1.1

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

Flavours and fragrances an attractive market

The flavours and fragrances market continues to be an attractive space, and Treatt successfully embraces the sweet spot. Its portfolio is well-suited for the current consumer trends of clean labels and more natural, better-for-you products. For example, the consumer shift away from categories such as beer and towards products such as craft beers, alcoholic seltzers and cocktails – which all contain natural flavourings – serves as a material driver of growth for the whole flavour industry, and for Treatt in particular.

Margins continue to improve

Treatt’s continued focus on value-added products has helped to offset the impact of both the COVID-19 pandemic and lower orange oil prices. Gross margins in the citrus category – and indeed absolute gross profits – were above the prior year, as the business increasingly focuses on value-added customer solutions and moves away from commodity products. At group level, gross margins were also up as again the company derived a greater proportion of its sales from value-added products and categories. The company reported that it ended FY20 with net cash of £1.0m on a pre-IFRS 16 basis.

Valuation: Fair value of 670p

We value Treatt using a DCF model, which indicates a fair value of 670p (from 560p previously). We have reduced our risk-free rate assumption from 3% to 2% given the current outlook for interest rates globally, and hence our WACC falls from 7.0% to 6.0%. Our earnings estimates remain broadly unchanged following the announcement. On a calendarised basis, Treatt trades at 28.5x FY21e P/E and 16.4x FY21e EV/EBITDA. On both P/E and EV/EBITDA multiples, it trades at a c 6–7% discount to its peer group.

Forecasts revision

We update our forecasts to reflect the latest trading. We cut our revenue estimates to factor in the continued weakness in citrus pricing, but our profit forecasts remain broadly unchanged. We illustrate the changes in Exhibit 1 below.

Exhibit 1: Old vs new key P&L forecasts

EPS (p)*

PBT* (£000s)

Revenue (£000s)

Old

New

% change

Old

New

% change

Old

New

% change

FY20e

17.7

17.6

-0.3%

14,029

13,987

-0.3%

114,971

109,335

-4.9%

FY21e

18.9

18.9

0.3%

14,981

15,020

0.3%

119,570

114,802

-4.0%

FY22e

20.0

20.0

0.3%

15,864

15,912

0.3%

124,353

119,394

-4.0%

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

We note the citrus category witnessed a 10% reduction in revenue in FY20, owing to the fall in citrus prices. The category now represents 50% of group revenues. Health & wellness grew by 16%, while fruit & vegetables also performed well and revenues were up 10%. Tea has historically been a strong category for Treatt, and indeed revenues were up 47% during H1, but the division was materially affected by the loss of on-trade business during H2, and has thus ended the year with revenues down 2%. Herbs, spices & florals grew 8%, and the aroma and high-impact chemicals business was broadly flat year-on-year.

The outlook for FY21 is cautiously optimistic, and the board expects to see further growth across all its product categories.

Valuation

We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 2 below. For 2021, Treatt trades at a c 6–7% discount to its peer group on both a P/E and EV/EBITDA basis. Although it is smaller than its peers, its portfolio of products is increasingly specialised and the company has demonstrated its resilience with a robust performance despite the COVID-19 pandemic.

Exhibit 2: Comparative valuation

Market cap (m)

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

2020e

2021e

2020e

2021e

2020e

2021e

Givaudan

CHF 37,219

43.3

40.1

29.3

27.7

1.6

1.7

IFF

$12,459

20.2

18.7

15.7

14.3

2.6

2.8

Symrise

CHF 15,796

43.5

39.8

22.4

21.1

0.9

1.0

Chr Hansen

DKK 6,264

45.5

43.1

30.0

27.5

1.3

1.5

Kerry

€ 87,797

31.6

27.4

21.4

19.3

0.7

0.8

Ingredion

$2,608

13.5

11.9

8.0

7.4

3.2

3.3

Peer group average

33.8

32.9

21.8

21.2

1.8

1.7

Treatt

346.6

30.5

28.5

19.9

16.4

1.0

1.1

Premium/(discount) to peer group (%)

(9.2%)

(7.4%)

0.3%

(6.1%)

(46.3%)

(41.3%)

Source: Refinitiv, Edison Investment Research. Note: Prices as of 8 October 2020. Calendarised

We upgrade our DCF-derived fair value to 670p (from 560p previously). Our longer-term sales growth forecast remains at 5.0% pa, falling to 2% growth in perpetuity, but we reduce our risk-free rate from 3% to 2% given the current outlook for interest rates globally, and in the UK in particular. Our WACC therefore moves to 6.0% (from 7.0%) as our other assumptions remain unchanged (beta of 0.8, an equity risk premium of 5.0% and a borrowing spread of 5.0%).

Exhibit 3: Financial summary

£000's

2016

2017

2018

2019

2020e

2021e

2022e

Year-end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

88,040

101,250

112,163

112,717

109,335

114,802

119,394

Cost of Sales

(67,639)

(75,985)

(84,407)

(84,060)

(80,445)

(84,352)

(87,488)

Gross Profit

20,401

25,265

27,756

28,657

28,891

30,450

31,907

EBITDA

 

 

11,604

15,049

16,627

15,785

16,759

20,847

22,334

Operating Profit (before amort., except and share-based payments)

 

 

10,257

13,650

15,108

14,226

14,936

15,718

16,587

Intangible Amortisation

(142)

(137)

(124)

(90)

(77)

(65)

(55)

Share based payments

(566)

(966)

(1,040)

(637)

(672)

(722)

(765)

Other

0

0

0

0

0

0

0

Operating Profit

9,549

12,547

13,944

13,499

14,187

14,931

15,767

Net Interest

(703)

(851)

(1,302)

(199)

(200)

88

144

Exceptionals

(553)

0

(1,105)

(755)

0

0

0

Profit Before Tax (norm)

 

 

9,554

12,799

13,806

14,027

14,736

15,807

16,732

Profit Before Tax (FRS 3)

 

 

8,293

11,696

11,537

12,545

13,987

15,020

15,912

Profit Before Tax (company)

 

 

8,846

11,696

12,642

13,300

13,987

15,020

15,912

Tax

(2,144)

(3,129)

(2,284)

(2,673)

(3,567)

(3,830)

(4,057)

Profit After Tax (norm)

7,410

9,670

11,522

11,354

11,170

11,977

12,674

Profit After Tax (FRS 3)

6,149

8,567

9,253

9,872

10,421

11,190

11,854

Discontinued operations

0

978

2,976

(1,084)

0

0

0

Average Number of Shares Outstanding (m)

51.9

52.2

56.8

59.1

59.1

59.1

59.1

EPS - normalised (p)

 

 

14.3

18.5

20.3

19.2

18.9

20.3

21.4

EPS - normalised & fully diluted (p)

 

 

14.1

17.9

19.8

18.9

18.6

20.0

21.1

EPS - (IFRS) (p)

 

 

11.8

16.4

18.0

17.8

17.6

18.9

20.0

Dividend per share (p)

4.4

4.8

5.1

5.5

5.8

6.2

6.6

Gross Margin (%)

23.2

25.0

24.7

25.4

26.4

26.5

26.7

EBITDA Margin (%)

13.2

14.9

14.8

14.0

15.3

18.2

18.7

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

11.7

13.5

13.5

12.6

13.7

13.7

13.9

BALANCE SHEET

Fixed Assets

 

 

16,161

19,532

21,863

31,730

53,471

56,500

50,989

Intangible Assets

3,364

3,331

752

845

769

703

648

Tangible Assets

11,361

14,821

20,038

29,485

51,303

54,396

48,940

Investments

1,436

1,380

1,073

1,400

1,400

1,400

1,400

Current Assets

 

 

54,435

68,230

102,401

98,158

96,690

99,206

101,329

Stocks

29,990

42,878

39,642

36,799

37,393

39,033

40,355

Debtors

17,853

19,973

28,828

23,020

22,111

22,987

23,787

Cash

6,588

4,748

32,304

37,187

37,187

37,187

37,187

Other

4

631

1,627

1,152

0

0

0

Current Liabilities

 

 

(16,388)

(27,003)

(35,781)

(28,905)

(34,397)

(32,546)

(24,393)

Creditors

(15,834)

(19,266)

(16,479)

(11,784)

(10,499)

(10,450)

(10,271)

Short term borrowings

(487)

(7,680)

(19,244)

(16,860)

(23,898)

(22,096)

(14,122)

Provisions

(67)

(57)

(58)

(261)

0

0

0

Long Term Liabilities

 

 

(17,021)

(14,281)

(6,858)

(13,876)

(22,256)

(21,155)

(16,968)

Long term borrowings

(7,755)

(7,293)

(3,001)

(4,369)

(11,949)

(11,048)

(7,061)

Other long-term liabilities

(9,266)

(6,988)

(3,857)

(9,507)

(10,307)

(10,107)

(9,907)

Net Assets

 

 

37,187

46,478

81,625

87,107

93,509

102,005

110,957

CASH FLOW

Operating Cash Flow

 

 

10,804

4,683

3,580

20,544

16,042

18,082

19,833

Net Interest

(703)

(913)

(609)

(199)

(200)

88

144

Tax

(2,022)

(2,822)

(2,978)

(2,208)

(3,567)

(3,830)

(4,057)

Capex

(679)

(5,111)

(6,190)

(10,392)

(23,640)

(8,222)

(291)

Acquisitions/disposals

(861)

(1,667)

8,357

855

0

0

0

Financing

280

270

21,090

622

0

0

0

Dividends

(2,095)

(3,025)

(2,876)

(3,080)

(3,253)

(3,415)

(3,667)

Net Cash Flow

4,724

(8,585)

20,374

6,142

(14,618)

2,703

11,961

Opening net debt/(cash)

 

 

6,155

1,654

10,225

(10,059)

(15,958)

(1,340)

(4,043)

HP finance leases initiated

0

0

0

0

0

0

0

Other

(223)

14

(90)

(243)

0

0

0

Closing net debt/(cash)

 

 

1,654

10,225

(10,059)

(15,958)

(1,340)

(4,043)

(16,004)

Source: Company accounts, Edison Investment Research


General disclaimer and copyright

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

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison 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 2020 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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.

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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

This document is prepared and provided by Edison 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.

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.

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.

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Schumannstrasse 34b

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London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

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1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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Level 4, Office 1205

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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 research department of Edison 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 2020 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison 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.

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.

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

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

1185 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

1185 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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Research: Financials

RCM Beteiligungs — Disposal standstill in Q220

In H120, RCM Beteiligungs group reported €10.2m in revenues against €19.2m in H119. The decline was attributable to a lower volume of property disposals, as rental income remained broadly stable at €0.8m. The large volume drop in transaction activity is mostly due to a weak Q220 amid the COVID-19 outbreak, as well as a strong prior-year comparison, which included the €9.8m disposal of a residential and commercial complex. Lower disposal volume translated into a c 48.8% y-o-y decline in consolidated pre-tax profit to €2.1m. However, a €2.4m sale was completed in Q320, suggesting some pick-up in the real estate investment market activity.

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