Treatt — Demonstrating its resilience

Treatt (LSE: TET)

Last close As at 28/03/2024

420.00

2.00 (0.48%)

Market capitalisation

257m

More on this equity

Research: Consumer

Treatt — Demonstrating its resilience

Treatt has had another successful half year, and the COVID-19 pandemic has, to date, had no adverse effect on the business. As previously stated, the sharp fall in citrus prices during FY19 has continued into H120, hence H1 revenue is down 5.6% at constant currency. There was good growth in the other parts of the business, with tea and health & wellness as the standout performers. Building work on the new UK site has slowed due to the COVID-19 pandemic, and at this stage guidance is for relocation to be in 2021, ie a c three- to six-month delay vs previous guidance of Q420. Our forecasts and fair value remain unchanged at 530p.

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Written by

Consumer

Treatt

Demonstrating its resilience

H120 trading update

Food & beverages

9 April 2020

Price

483.0p

Market cap

£291m

Net cash (£m) at 31 March 2020

6.5

Shares in issue

60.2m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.8

1.7

19.3

Rel (local)

20.2

36.1

54.6

52-week high/low

546.0p

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

H120 results

12 May 2020

Trading update

September 2020

FY20 results

24 November 2020

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 had another successful half year, and the COVID-19 pandemic has, to date, had no adverse effect on the business. As previously stated, the sharp fall in citrus prices during FY19 has continued into H120, hence H1 revenue is down 5.6% at constant currency. There was good growth in the other parts of the business, with tea and health & wellness as the standout performers. Building work on the new UK site has slowed due to the COVID-19 pandemic, and at this stage guidance is for relocation to be in 2021, ie a c three- to six-month delay vs previous guidance of Q420. Our forecasts and fair value remain unchanged at 530p.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/18

112.2

13.8

20.3

5.1

23.8

1.1

09/19

112.7

14.0

19.2

5.5

25.2

1.2

09/20e

115.0

14.8

18.9

5.8

25.5

1.2

09/21e

119.6

15.8

20.3

6.2

23.8

1.3

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

COVID-19 pandemic has had no adverse effect

The company is following relevant government guidelines and has implemented appropriate health and safety measures. Its order intake has been strong, as its customers have responded to increased demand for cleaning products and beverages consumed at home. The pandemic, therefore, has so far had no adverse effect on the overall business, with the exception of the above-mentioned delay to the relocation of the UK business. This will help to preserve cash, and the company’s financial position remains extremely comfortable, with current net cash of £6.5m and total bank facilities of £25m, of which £24.9m remains undrawn.

Demand remains strong

The company continues to successfully embrace 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. The order book and current demand are looking healthy ahead of the peak seasonal period. While citrus prices have continued to be lower than the prior year during H1, they have been recovering and in H2 will start to lap easier comparatives. We therefore continue to expect revenue growth during H2. We note that the non-citrus categories have continued to perform very well, with tea revenues up 47.5%, fruit and vegetables up 9.4% and health and wellness up 19.9% during H1, and we leave our estimates unchanged. This reflects the company’s statement that demand so far has been robust and trading remains in line with the board’s expectations.

Valuation: Remains attractive

We value Treatt using a DCF model, which indicates a fair value of 530p (unchanged). On a calendarised basis, Treatt trades at 25.1x FY20e P/E and 16.5x FY20e EV/EBITDA. On both P/E and EV/EBITDA multiples, it trades in line with its peer group, as it has demonstrated its resilience and defensive qualities.

Valuation

We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 1 below. For 2020, Treatt trades in line with 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 1: Comparative valuation

Market cap (m)

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

2020e

2021e

2020e

2021e

2020e

2021e

Givaudan

CHF27,856

32.4

32.0

24.7

22.0

5.1

4.8

IFF

$11,641

17.7

17.7

13.9

13.8

3.0

3.0

Symrise

CHF11,641

40.1

31.6

19.5

17.1

3.9

3.6

Chr Hansen

DKK67,373

35.6

23.7

8.3

Kerry

€16,242

23.3

22.0

16.8

15.9

2.5

2.4

Ingredion

$5,388

12.1

11.9

7.6

7.4

1.1

1.1

Peer group average

25.1

25.1

16.5

16.6

3.1

3.9

Treatt

£286

25.1

23.5

16.5

14.8

1.2

1.3

Premium/(discount) to peer group (%)

(0.2%)

(6.5%)

0.0%

(13.5%)

(61.3%)

(66.4%)

Source: Refinitiv, Edison Investment Research. Note: Prices as of 7 April 2020.

Our DCF-derived fair value is unchanged at 530p 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

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

114,971

119,570

124,353

Cost of Sales

(67,639)

(75,985)

(84,407)

(84,060)

(85,281)

(88,453)

(91,743)

Gross Profit

20,401

25,265

27,756

28,657

29,690

31,117

32,610

EBITDA

 

 

11,604

15,049

16,627

15,785

16,896

19,116

20,076

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

 

 

10,257

13,650

15,108

14,226

14,980

15,742

16,622

Intangible Amortisation

(142)

(137)

(124)

(90)

(77)

(65)

(55)

Share based payments

(566)

(966)

(1,040)

(637)

(674)

(723)

(766)

Other

0

0

0

0

0

0

0

Operating Profit

9,549

12,547

13,944

13,499

14,229

14,953

15,800

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

14,780

15,830

16,766

Profit Before Tax (FRS 3)

 

 

8,293

11,696

11,537

12,545

14,029

15,042

15,945

Profit Before Tax (company)

 

 

8,846

11,696

12,642

13,300

14,029

15,042

15,945

Tax

(2,144)

(3,129)

(2,284)

(2,673)

(3,577)

(3,836)

(4,066)

Profit After Tax (norm)

7,410

9,670

11,522

11,354

11,202

11,994

12,701

Profit After Tax (FRS 3)

6,149

8,567

9,253

9,872

10,452

11,206

11,879

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

60.2

60.2

60.2

EPS - normalised (p)

 

 

14.3

18.5

20.3

19.2

18.9

20.3

21.5

EPS - normalised & fully diluted (p)

 

 

14.1

17.9

19.8

18.9

18.7

20.0

21.2

EPS - (IFRS) (p)

 

 

11.8

16.4

18.0

17.8

17.7

18.9

20.1

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

25.8

26.0

26.2

EBITDA Margin (%)

13.2

14.9

14.8

14.0

14.7

16.0

16.1

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

11.7

13.5

13.5

12.6

13.0

13.2

13.4

BALANCE SHEET

Fixed Assets

 

 

16,161

19,532

21,863

31,730

44,462

39,316

36,171

Intangible Assets

3,364

3,331

752

845

769

703

648

Tangible Assets

11,361

14,821

20,038

29,485

42,293

37,212

34,123

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

97,628

99,567

101,689

Stocks

29,990

42,878

39,642

36,799

37,190

38,439

39,727

Debtors

17,853

19,973

28,828

23,020

23,250

23,941

24,775

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)

(29,212)

(21,481)

(14,883)

Creditors

(15,834)

(19,266)

(16,479)

(11,784)

(11,155)

(11,003)

(10,822)

Short term borrowings

(487)

(7,680)

(19,244)

(16,860)

(18,057)

(10,478)

(4,062)

Provisions

(67)

(57)

(58)

(261)

0

0

0

Long Term Liabilities

 

 

(17,021)

(14,281)

(6,858)

(13,876)

(19,336)

(15,346)

(11,938)

Long term borrowings

(7,755)

(7,293)

(3,001)

(4,369)

(9,029)

(5,239)

(2,031)

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

93,542

102,056

111,039

CASH FLOW

Operating Cash Flow

 

 

10,804

4,683

3,580

20,544

15,898

16,825

17,573

Net Interest

(703)

(913)

(609)

(199)

(200)

88

144

Tax

(2,022)

(2,822)

(2,978)

(2,208)

(3,577)

(3,836)

(4,066)

Capex

(679)

(5,111)

(6,190)

(10,392)

(14,725)

1,706

(365)

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)

(3,662)

Net Cash Flow

4,724

(8,585)

20,374

6,142

(5,856)

11,369

9,624

Opening net debt/(cash)

 

 

6,155

1,654

10,225

(10,059)

(15,958)

(10,101)

(21,470)

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)

(10,101)

(21,470)

(31,094)

Source: Company data, Edison Investment Research


General disclaimer and copyright

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

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

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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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

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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

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 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).

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

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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