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Another Treat(t)

Treatt 22 January 2021 Update
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Treatt

Another Treat(t)

Trading update

Food & beverages

22 January 2021

Price

760.00p

Market cap

£458m

Net cash (£m) at 30 September 2020

0.4

Shares in issue

60.3m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.8

2.8

15.9

Rel (local)

0.8

(10.9)

24.2

52-week high/low

828.0p

310.0p

Business description

Treatt provides innovative ingredient solutions from its manufacturing bases in Europe and North America, principally for the flavours and fragrance industries and multinational consumer goods companies, with particular emphasis on the beverage sector.

Next events

AGM

29 January 2021

H121 results

11 May 2021

FY21 results

30 November 2021

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

Treatt has once again delivered an exceptional performance in the first four months of FY21, with strong momentum across multiple categories contributing to growth. Operating margins have benefited from the improved product mix as Treatt continues to move up the value chain and partners with its customers to develop new products. Despite only being four months into the new financial year, the board is cautiously optimistic about continued growth and exceeding current market expectations. We raise our sales forecasts by 7–10% over the next three years and our operating profit and earnings forecasts by 20–32%. Our fair value also moves up to 870p.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/19

112.7

14.0

19.0

5.5

39.9

0.7%

09/20

109.0

15.8

21.3

6.0

35.6

0.8%

09/21e

123.2

19.4

26.4

7.5

28.8

1.0%

09/22e

130.6

21.5

29.3

8.3

26.0

1.1%

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

Step change in growth

Treatt has transformed itself from a commodity-based ingredients trading house into a supplier of value-added ingredients and ingredient solutions, and its financial performance reflects this change. Its technical expertise is being utilised across a growing range of applications, which has led to revenue growth and margin expansion. We believe this is likely to continue beyond FY21, hence our forecast of continued strong growth in both revenues and margins in FY22 and FY23.

Demand remains strong

The demand for flavour ingredients remains strong and, indeed, the COVID-19 pandemic has resulted in consumers increasingly focusing on health and wellbeing, thus demanding authentic flavours with clean labels. The beverages market has seen a switch from the on-trade to the off-trade channel as restrictions have been imposed globally. For beverages companies this has typically resulted in margin erosion, while for the flavour industry the more important metric is overall volume consumed and Treatt has seen an overall increase in demand for its products.

Valuation: At a premium to its peers

We value Treatt using a DCF model, which indicates a fair value of 870p (up from 670p). We have raised our operating forecasts materially for this year, but we expect the momentum to continue and hence have also raised our FY22 and FY23 forecasts. For FY21e Treatt trades at 28.8x P/E and 19.5x EV/EBITDA. This is broadly in line with its peer group in both cases.

Forecasts

In light of the current trading trends discussed above, we raise our forecasts for FY21–23 as detailed in Exhibit 1. We expect the current momentum to continue, but also expect the mix to keep improving through FY22 and FY23, thus delivering an acceleration in sales and operating performance. Given the significantly better performance we are expecting, we have also raised our capex forecasts for FY22 and FY23 as we assume more investment will be required to fulfil the increased demand. We have also increased our dividend per share forecasts, in light of increased EPS expectations.

Exhibit 1: Old versus new key P&L forecasts

2021

2022

2023

Old

New

Diff

Old

New

Diff

Old

New

Diff

Revenue

114,467

123,188

7.6%

119,045

130,579

9.7%

123,807

138,414

11.8%

Operating profit

15,160

18,163

19.8%

16,004

20,166

26.0%

16,892

22,345

32.3%

PBT*

15,166

18,147

19.7%

16,053

20,162

25.6%

17,006

22,385

31.6%

PBT (pre-exceptional) Edison

16,221

19,397

19.6%

17,156

21,533

25.5%

18,163

23,894

31.6%

Basic EPS*

20.3

24.3

19.7%

21.5

27.0

25.6%

22.7

29.9

31.6%

Basic EPS (pre-exceptional) Edison

22.0

26.3

19.6%

23.3

29.2

25.5%

24.7

32.4

31.5%

Source: Edison Investment Research. Note: *Stated on an FRS/reported basis.

Valuation

We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 2 below. For 2021, Treatt trades broadly in line with its peer group on both P/E and EV/EBITDA. Although it is smaller than its peers, its portfolio of products is increasingly specialised and the company has demonstrated its resilience with 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

CHF32,779

38.4

35.9

26.2

25.1

1.8

1.9

IFF

$12,841

21.5

19.8

16.1

14.8

2.5

2.8

Symrise

CHF13,610

38.5

35.4

19.9

18.9

1.0

1.1

Chr Hansen

DKK71,996

37.1

43.1

26.8

28.3

1.5

1.6

Kerry

€19,830

32.7

28.8

22.1

20.1

0.7

0.8

Ingredion

$5,300

13.3

12.3

8.3

7.7

3.3

3.3

Peer group average

30.4

30.3

20.3

19.9

1.9

1.8

Treatt

£453

35.6

28.8

26.8

19.5

0.8

1.0

Premium/(discount) to peer group (%)

17.8%

(1.3%)

34.5%

1.8%

(56.5%)

(48.6%)

Source: Refinitiv, Edison Investment Research. Note: Priced at 21 January 2021.

Our DCF-derived fair value increases to 870p given our increased short-term forecasts. Our WACC has fallen to 5.8% (beta of 0.8, a risk-free rate of 2.0%, an equity risk premium of 5.0% and a borrowing spread of 5.0%). We leave our medium-term sales growth assumption of 5.0% pa unchanged, falling to 2% growth in perpetuity (also unchanged). We note that a medium-term sales growth of 5.5% would lift our fair value to c 900p, as illustrated in Exhibit 3.

Exhibit 3: DCF sensitivity to terminal growth rate and sales growth (p/share)

Sales growth

4.0%

4.5%

5.0%

5.5%

6.0%

Terminal growth

-1.0%

557

571

586

601

616

0.0%

614

631

647

664

682

1.0%

696

715

735

755

775

2.0%

822

845

869

893

919

3.0%

1038

1069

1100

1133

1166

4.0%

1502

1549

1596

1646

1696

Source: Edison Investment Research

Exhibit 4: Financial summary

£000s

2017

2018

2019

2020

2021e

2022e

2023e

Year-end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

101,250

112,163

112,717

109,016

123,188

130,579

138,414

Cost of Sales

(75,985)

(84,407)

(84,060)

(77,140)

(86,552)

(91,092)

(95,866)

Gross Profit

25,265

27,756

28,657

31,876

36,636

39,487

42,548

EBITDA

 

 

15,049

16,627

15,785

17,862

23,322

28,048

30,495

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

 

 

13,650

15,108

14,226

16,053

19,413

21,539

23,855

Intangible Amortisation

(137)

(124)

(90)

(75)

(64)

(54)

(46)

Share based payments

(966)

(1,040)

(637)

(886)

(1,186)

(1,318)

(1,464)

Other

0

0

0

0

0

0

0

Operating Profit

12,547

13,944

13,499

15,092

18,163

20,166

22,345

Net Interest

(851)

(1,302)

(199)

(291)

(14)

2

53

Exceptionals

0

(1,105)

(755)

(1,060)

0

0

0

Profit Before Tax (norm)

 

 

12,799

13,806

14,027

15,762

19,399

21,540

23,908

Profit Before Tax (FRS 3)

 

 

11,696

11,537

12,545

13,741

18,149

20,168

22,398

Profit Before Tax (company)

 

 

11,696

12,642

13,300

14,801

18,149

20,168

22,398

Tax

(3,129)

(2,284)

(2,673)

(2,896)

(3,630)

(4,034)

(4,480)

Profit After Tax (norm)

9,670

11,392

11,263

12,762

15,769

17,507

19,428

Profit After Tax (FRS 3)

8,567

9,253

9,872

10,845

14,519

16,135

17,918

Discontinued operations

978

2,976

(1,084)

0

0

0

0

Average Number of Shares Outstanding (m)

52.2

56.8

59.1

59.8

59.8

59.8

59.8

EPS - normalised (p)

 

 

18.5

20.1

19.0

21.3

26.4

29.3

32.5

EPS - adjusted (p)

 

 

18.3

18.0

17.8

19.7

24.3

27.0

29.9

EPS - (IFRS) (p)

 

 

16.4

16.3

16.7

18.1

24.3

27.0

29.9

Dividend per share (p)

4.8

5.1

5.5

6.0

7.5

8.3

9.3

Gross Margin (%)

25.0

24.7

25.4

29.2

29.7

30.2

30.7

EBITDA Margin (%)

14.9

14.8

14.0

16.4

18.9

21.5

22.0

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

13.5

13.5

12.6

14.7

15.8

16.5

17.2

BALANCE SHEET

Fixed Assets

 

 

19,532

21,863

31,730

54,048

62,250

61,146

61,536

Intangible Assets

3,331

752

845

1,358

1,294

1,240

1,194

Tangible Assets

14,821

20,038

29,485

50,159

59,598

58,548

58,984

Investments

1,380

1,073

1,400

2,531

1,358

1,358

1,358

Current Assets

 

 

68,230

102,401

98,158

69,472

75,291

78,953

91,617

Stocks

42,878

39,642

36,799

36,050

40,490

42,658

44,941

Debtors

19,973

28,828

23,020

24,167

27,062

28,555

30,130

Cash

4,748

32,304

37,187

7,739

7,739

7,739

16,545

Other

631

1,627

1,152

1,516

0

0

0

Current Liabilities

 

 

(27,003)

(35,781)

(28,905)

(15,989)

(20,693)

(13,930)

(13,201)

Creditors

(19,266)

(16,479)

(11,784)

(12,640)

(12,981)

(13,107)

(13,201)

Short term borrowings

(7,680)

(19,244)

(16,860)

(3,203)

(7,712)

(823)

0

Provisions

(57)

(58)

(261)

(146)

0

0

0

Long Term Liabilities

 

 

(14,281)

(6,858)

(13,876)

(16,411)

(17,617)

(13,973)

(13,361)

Long term borrowings

(7,293)

(3,001)

(4,369)

(3,450)

(3,856)

(412)

0

Other long term liabilities

(6,988)

(3,857)

(9,507)

(12,961)

(13,761)

(13,561)

(13,361)

Net Assets

 

 

46,478

81,625

87,107

91,120

99,232

112,196

126,591

CASH FLOW

Operating Cash Flow

 

 

4,683

3,580

20,544

15,677

16,326

24,312

26,532

Net Interest

(913)

(609)

(199)

(191)

(14)

2

53

Tax

(2,822)

(2,978)

(2,208)

(2,191)

(3,630)

(4,034)

(4,480)

Capex

(5,111)

(6,190)

(10,392)

(23,909)

(13,348)

(5,459)

(7,076)

Acquisitions/disposals

(1,667)

8,357

855

(1,041)

0

0

0

Financing

270

21,090

622

(69)

0

0

0

Dividends

(3,025)

(2,876)

(3,080)

(3,378)

(3,590)

(4,488)

(4,987)

Net Cash Flow

(8,585)

20,374

6,142

(15,102)

(4,256)

10,334

10,041

Opening net debt/(cash)

 

 

1,654

10,225

(10,059)

(15,958)

(427)

3,829

(6,504)

HP finance leases initiated

0

0

0

0

0

0

0

Other

14

(90)

(243)

(429)

(0)

0

(0)

Closing net debt/(cash)

 

 

10,225

(10,059)

(15,958)

(427)

3,829

(6,504)

(16,545)

Source: Edison Investment Research, company 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 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 2021 Edison Investment Research Limited (Edison).

Australia

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.

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Frankfurt +49 (0)69 78 8076 960

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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

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 2021 Edison Investment Research Limited (Edison).

Australia

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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