Treatt — Another upward surprise

Treatt (LSE: TET)

Last close As at 27/03/2024

420.00

2.00 (0.48%)

Market capitalisation

257m

More on this equity

Research: Consumer

Treatt — Another upward surprise

Despite the surprise trading statement of 23 February, which led us to raise our sales forecasts by c 10% and PBT and EPS by c 20-30%, Treatt has yet again upgraded its outlook for FY17, which leads us to raise our EPS forecasts again by c 6-9%. Our fair value increases to 401p (from 350p) as a result. The constant stream of upgrades demonstrates the strength of momentum in the business as the company moves further up the value chain.

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Consumer

Treatt

Another upward surprise

H117 trading update

Food & beverages

7 April 2017

Price

382.50p

Market cap

£198m

Net debt (£m) at 31 March 2017

12.0

Shares in issue

51.9m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

14.4

55.2

128.4

Rel (local)

14.7

52.3

94.1

52-week high/low

382.5p

163.5p

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

H117 results

9 May 2017

FY trading update

September 2017

FY17 results

28 November 2017

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

Despite the surprise trading statement of 23 February, which led us to raise our sales forecasts by c 10% and PBT and EPS by c 20-30%, Treatt has yet again upgraded its outlook for FY17, which leads us to raise our EPS forecasts again by c 6-9%. Our fair value increases to 401p (from 350p) as a result. The constant stream of upgrades demonstrates the strength of momentum in the business as the company moves further up the value chain.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/16

88.0

9.6

14.3

4.4

26.7

1.2

09/17e

102.1

13.6

20.0

6.1

19.1

1.6

09/18e

107.2

14.4

21.2

6.5

18.0

1.7

09/19e

111.5

14.9

22.0

6.7

17.4

1.8

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

Strategy delivering excellent results

Treatt’s long-term strategy is to deliver consistent, sustainable growth in profit through developing value-added ingredient solutions, coupled with effective cost control. Improved customer focus and closer relationships are a key part of this strategy, with the ultimate goal of delivering greater profitability by concentrating on the more value-added segments. This goal has been delivered consistently over the past few years, with results often beating expectations, and momentum is now accelerating, with more frequent and more significant upgrades coming through. As a result of the trading update, we yet again upgrade our full-year forecasts for 2017-19 to reflect the improved outlook. Our sales forecasts move up c 0-3%, while PBT and EPS increase by c 6-9%, as Treatt’s move up the value chain should deliver a strong improvement in margins.

Momentum remains strong

Trading has continued to be strong, with H117 sales c 25% above those of the previous year. A stronger US$ accounts for part of this (c 10%), but the remainder is due to impressive organic growth. Sugar reduction, tea and citrus continue to be the key areas of focus and this is paying dividends, with particularly strong growth in these segments. The ingredients space remains attractive, with higher than average growth vis-à-vis the wider consumer space, as consumers demand cleaner labels and healthier products, but with no compromise on taste. Margins are also typically high at the value-added end as these ingredients are highly specialised and deliver key attributes to the products.

Valuation: Fair value of 401p

Our DCF-derived fair value is 401p (previously 350p), c 6% upside to the current share price. The move is driven by our forecast upgrades and our increased confidence in the business given the positive momentum, which leads us to increase our terminal EBIT margin assumption to 15% (from 13%).

Forecast revisions

We detail our key changes to P&L forecasts in Exhibit 1 below. We have upgraded our FY17 forecasts to reflect the excellent H117 and the strong momentum going into H2, as Treatt is accelerating its move up the value chain, and order books for the remainder of FY17 and for FY18 are accelerating upwards. We leave our FY18 and FY19 sales forecasts broadly unchanged, but continue to see potential for further upgrades. Improved sales growth should lead to operating leverage, and the move towards value-added products should continue to be beneficial to margins. Our EPS forecasts therefore move up by c 6-9%.

Exhibit 1: Old vs new key P&L forecasts

EPS* (p)

PBT* (£000s)

Sales (£000s)

Old

New

% change

Old

New

% change

Old

New

% change

2017e

16.5

18.0

9.0

11,525

12,560

9.0

99,485

102,126

2.7

2018e

18.1

19.2

5.7

12,629

13,353

5.7

107,444

107,233

(0.2)

2019e

18.8

19.8

5.8

13,063

13,816

5.8

111,742

111,522

(0.2)

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

Sensitivities

Despite 60% of turnover being exposed to the ‘defensive’ beverage sector, Treatt has two key sensitivities, which it seeks to mitigate through the in-depth knowledge and skill base of its buying team and by undertaking an active hedging policy where possible:

Commodity exposure: namely citrus oils, which make up c 30% of revenues.

Foreign exchange: translation risk on US dollar profits, which it manages through hedging.

Exhibit 2: Financial summary

£000's

2014

2015

2016

2017e

2018e

2019e

Year-end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

79,189

85,934

88,040

102,126

107,233

111,522

Cost of Sales

(61,218)

(66,955)

(67,639)

(76,623)

(80,132)

(83,115)

Gross Profit

17,971

18,979

20,401

25,503

27,100

28,407

EBITDA

 

 

9,068

10,307

11,604

15,843

17,067

18,073

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

 

 

7,846

9,063

10,257

14,141

15,280

16,214

Intangible Amortisation

(172)

(175)

(142)

(160)

(160)

(160)

Share based payments

(46)

(198)

(566)

(861)

(916)

(947)

Other

0

0

0

0

0

0

Operating Profit

7,628

8,690

9,549

13,119

14,204

15,107

Net Interest

(724)

(740)

(703)

(559)

(851)

(1,291)

Exceptionals

(1,402)

(174)

(553)

0

0

0

Profit Before Tax (norm)

 

 

7,122

8,323

9,554

13,582

14,429

14,923

Profit Before Tax (FRS 3)

 

 

5,502

7,776

8,293

12,560

13,353

13,816

Profit Before Tax (company)

 

 

6,904

7,950

8,846

12,560

13,353

13,816

Tax

(1,553)

(1,786)

(2,144)

(3,203)

(3,405)

(3,523)

Profit After Tax (norm)

5,326

6,537

7,410

10,379

11,024

11,400

Profit After Tax (FRS 3)

3,949

5,990

6,149

9,357

9,948

10,293

Average Number of Shares Outstanding (m)

51.3

51.5

51.9

51.9

51.9

51.9

EPS - normalised (p)

 

 

10.4

12.7

14.3

20.0

21.2

22.0

EPS - normalised & fully diluted (p)

 

 

10.3

12.6

14.1

19.7

20.9

21.6

EPS - (IFRS) (p)

 

 

7.7

11.6

11.8

18.0

19.2

19.8

Dividend per share (p)

3.8

4.0

4.4

6.1

6.5

6.7

Gross Margin (%)

22.7

22.1

23.2

25.0

25.3

25.5

EBITDA Margin (%)

11.5

12.0

13.2

15.5

15.9

16.2

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

9.9

10.5

11.7

13.8

14.2

14.5

BALANCE SHEET

Fixed Assets

 

 

13,777

13,381

16,161

22,331

39,992

43,146

Intangible Assets

1,801

1,736

3,364

3,204

3,044

2,884

Tangible Assets

10,994

10,998

11,361

17,691

35,512

38,826

Investments

982

647

1,436

1,436

1,436

1,436

Current Assets

 

 

43,590

45,045

54,435

51,913

52,875

53,743

Stocks

28,020

25,799

29,990

31,214

31,702

31,855

Debtors

14,509

17,635

17,853

20,199

20,673

21,388

Cash

629

1,477

6,588

500

500

500

Other

432

134

4

0

0

0

Current Liabilities

 

 

(16,005)

(13,481)

(16,388)

(17,795)

(25,483)

(23,274)

Creditors

(12,729)

(12,675)

(15,834)

(16,817)

(17,658)

(18,365)

Short term borrowings

(2,356)

(567)

(487)

(978)

(7,825)

(4,909)

Provisions

(920)

(239)

(67)

0

0

0

Long Term Liabilities

 

 

(12,602)

(11,760)

(17,021)

(9,801)

(13,024)

(11,367)

Long term borrowings

(7,857)

(7,065)

(7,755)

(489)

(3,912)

(2,455)

Other long term liabilities

(4,745)

(4,695)

(9,266)

(9,312)

(9,112)

(8,912)

Net Assets

 

 

28,760

33,185

37,187

46,648

54,360

62,249

CASH FLOW

Operating Cash Flow

 

 

3,528

8,667

10,804

14,739

16,746

17,711

Net Interest

(724)

(740)

(703)

(559)

(851)

(1,291)

Tax

(1,552)

(1,469)

(2,022)

(3,203)

(3,405)

(3,523)

Capex

(538)

(924)

(679)

(8,032)

(19,608)

(5,173)

Acquisitions/disposals

(208)

(103)

(861)

0

0

0

Financing

105

147

280

0

0

0

Dividends

(1,899)

(1,978)

(2,095)

(2,257)

(3,152)

(3,351)

Net Cash Flow

(1,288)

3,600

4,724

688

(10,271)

4,373

Opening net debt/(cash)

 

 

8,294

9,584

6,155

1,654

966

11,237

HP finance leases initiated

0

0

0

0

0

0

Other

(2)

(171)

(223)

(0)

(0)

0

Closing net debt/(cash)

 

 

9,584

6,155

1,654

966

11,237

6,864

Source: Edison Investment Research, Treatt

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Treatt and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Treatt and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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