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Reassuring confidence

Treatt 5 April 2018 Update
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Treatt

Reassuring confidence

H118 pre-close statement

Food & beverages

05 April 2018

Price

406.00p

Market cap

£233m

Net debt (£m) at 30 September 2017

10.2

Shares in issue

57.5m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.7)

(9.8)

7.0

Rel (local)

(1.1)

(1.6)

10.1

52-week high/low

523.0p

382.5p

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

H118 results

8 May 2018

FY18 results

27 November 2018

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

Following the exceptional results Treatt posted in FY17, momentum has continued in the business and revenues were up c 10% in H1. The core categories of citrus, tea and sugar reduction continue to drive the business, demonstrating that the company is well placed to capitalise on current trends in the food and beverage space: management’s outlook for FY18 remains unchanged. H1 will suffer from slightly negative FX effects, but US tax reform should lead to a significantly lower tax rate in future. We leave our forecasts unchanged at this stage, but see upside to our EPS forecasts from the lower tax rate, which remains unquantified at present.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/16

88.0

9.6

14.3

4.4

28.4

1.1

09/17

109.6

14.0

20.4

4.8

19.9

1.2

09/18e

117.3

14.4

19.2

4.6

21.6

1.1

09/19e

123.2

15.5

20.7

4.9

20.1

1.2

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

In the sweet spot

The growth rate achieved in FY17 (24.5% revenue growth) will be hard to replicate and should not be considered the new norm, but it does demonstrate that the company is successfully embracing the sweet spot in flavour ingredients. Following the exceptional year in FY17, management continues to build on the positive momentum with further business wins in H118.

Lower tax rate is a long term positive

At this stage, we leave our forecasts unchanged, but we note the positive comments around the tax rate. With regards to currency, although hedging is in place to mitigate any FX impact, in the shorter term the weakening dollar should lead to a small negative FX impact on the H1 results. More importantly, the US tax reform should yield a number of positive effects: (1) a lower headline tax rate for the US business; (2) a one-off deferred tax credit; and (3) a lower tax charge on exports out of the US business. Our forecasts currently assume an aggregate group tax rate of 25.5%. Every 100bp reduction in our group tax rate leads to a 1.3% upgrade to EPS.

Valuation: Attractive ingredients play

We value Treatt using a DCF model, which indicates a fair value of 515p, an attractive c 20% upside to the current share price. Treatt trades at 21.2x and 13.1x calendar P/E and EV/EBITDA multiples for 2018, representing discounts of c 20% to its ingredients peer group. Given the current growth trajectory of the business, and our forecast for low double-digit CAGR EPS for 2016-20, we believe this level of discount is unwarranted.

Valuation – discounted versus peers

We leave our valuation unchanged, but to provide perspective we illustrate Treatt’s valuation versus its ingredients peer group in Exhibit 1 below. Treatt trades at a significant discount to its peer group on all metrics. Some discount can be applied to reflect its small size and because some of its products are relatively ‘upstream’ in the ingredients spectrum, particularly the bulk ingredients that are sold to other ingredients companies. However, we believe a c 20% discount on EV/EBITDA and P/E is unwarranted.

Exhibit 1: Benchmark valuation

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

Market cap (m)

2018e

2019e

2018e

2019e

2018e

2019e

Givaudan

CHF19,917

25.8

23.3

17.9

16.1

2.8

3.0

IFF

$10,582

21.3

19.6

15.0

13.8

1.7

2.3

Symrise

CHF9,765

27.7

25.2

14.9

13.4

1.5

1.6

Frutarom

ILS19,231

28.1

25.0

18.2

16.2

0.4

0.4

Chr Hansen

DKK68,880

39.2

34.3

25.5

22.6

1.7

2.0

Kerry

€14,437

23.6

21.5

16.4

14.8

0.8

0.9

Ingredion

$9,133

15.2

14.3

8.9

8.2

1.9

2.0

Peer group average

25.8

23.3

16.7

15.0

1.3

1.5

Treatt

£213.9

21.2

19.8

13.1

11.2

1.1

1.2

Premium/(discount) to peer group (%)

-17.8%

-15.2%

-21.4%

-25.4%

-16.5%

-22.2%

Source: Bloomberg (prices as of 3 April 2018). Note: Treatt figures are calendarised to aid comparison.

Our DCF-derived fair value remains 515p, as we do not make any changes to our forecasts at this stage. 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 7.3% (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

2015

2016

2017

2018e

2019e

2020e

Year-end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

85,934

88,040

109,627

117,301

123,166

128,093

Cost of Sales

(66,955)

(67,639)

(82,819)

(88,258)

(92,055)

(95,609)

Gross Profit

18,979

20,401

26,808

29,043

31,111

32,483

EBITDA

 

 

10,307

11,604

16,307

17,317

20,539

22,680

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

 

 

9,063

10,257

14,908

15,362

16,886

17,840

Intangible Amortisation

(175)

(142)

(137)

(160)

(160)

(160)

Share based payments

(198)

(566)

(966)

(915)

(986)

(1,053)

Other

0

0

0

0

0

0

Operating Profit

8,690

9,549

13,805

14,287

15,741

16,626

Net Interest

(740)

(703)

(913)

(936)

(1,361)

(1,260)

Exceptionals

(174)

(553)

0

0

0

0

Profit Before Tax (norm)

 

 

8,323

9,554

13,995

14,427

15,525

16,580

Profit Before Tax (FRS 3)

 

 

7,776

8,293

12,892

13,352

14,380

15,366

Profit Before Tax (company)

 

 

7,950

8,846

12,892

13,352

14,380

15,366

Tax

(1,786)

(2,144)

(3,347)

(3,405)

(3,667)

(3,918)

Profit After Tax (norm)

6,537

7,410

10,648

11,022

11,858

12,661

Profit After Tax (FRS 3)

5,990

6,149

9,545

9,947

10,713

11,448

Average Number of Shares Outstanding (m)

51.5

51.9

52.2

57.4

57.4

57.4

EPS - normalised (p)

 

 

12.7

14.3

20.4

19.2

20.7

22.1

EPS - normalised & fully diluted (p)

 

 

12.6

14.1

19.8

18.7

20.1

21.4

EPS - (IFRS) (p)

 

 

11.6

11.8

18.3

17.3

18.7

19.9

Dividend per share (p)

4.0

4.4

4.8

4.6

4.9

5.2

Gross Margin (%)

22.1

23.2

24.5

24.8

25.3

25.4

EBITDA Margin (%)

12.0

13.2

14.9

14.8

16.7

17.7

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

10.5

11.7

13.6

13.1

13.7

13.9

BALANCE SHEET

Fixed Assets

 

 

13,381

16,161

19,532

43,176

63,211

62,132

Intangible Assets

1,736

3,364

3,331

3,171

3,011

2,851

Tangible Assets

10,998

11,361

14,821

38,625

58,820

57,901

Investments

647

1,436

1,380

1,380

1,380

1,380

Current Assets

 

 

45,045

54,435

68,230

71,295

74,129

76,392

Stocks

25,799

29,990

42,878

45,410

47,434

49,076

Debtors

17,635

17,853

19,973

21,137

21,947

22,569

Cash

1,477

6,588

4,748

4,748

4,748

4,748

Other

134

4

631

0

0

0

Current Liabilities

 

 

(13,481)

(16,388)

(27,003)

(28,722)

(38,444)

(33,244)

Creditors

(12,675)

(15,834)

(19,266)

(23,737)

(24,924)

(25,921)

Short term borrowings

(567)

(487)

(7,680)

(4,984)

(13,519)

(7,323)

Provisions

(239)

(67)

(57)

0

0

0

Long Term Liabilities

 

 

(11,760)

(17,021)

(14,281)

(9,877)

(13,945)

(10,646)

Long term borrowings

(7,065)

(7,755)

(7,293)

(2,492)

(6,760)

(3,661)

Other long term liabilities

(4,695)

(9,266)

(6,988)

(7,385)

(7,185)

(6,985)

Net Assets

 

 

33,185

37,187

46,478

75,872

84,952

94,634

CASH FLOW

Operating Cash Flow

 

 

8,667

10,804

4,683

19,343

18,691

21,215

Net Interest

(740)

(703)

(913)

(936)

(1,361)

(1,260)

Tax

(1,469)

(2,022)

(2,822)

(3,405)

(3,667)

(3,918)

Capex

(924)

(679)

(5,111)

(25,760)

(23,847)

(3,921)

Acquisitions/disposals

(103)

(861)

(1,667)

0

0

0

Financing

147

280

270

20,759

0

0

Dividends

(1,978)

(2,095)

(3,025)

(2,506)

(2,618)

(2,820)

Net Cash Flow

3,600

4,724

(8,585)

7,497

(12,803)

9,295

Opening net debt/(cash)

 

 

9,584

6,155

1,654

10,225

2,728

15,531

HP finance leases initiated

0

0

0

0

0

0

Other

(171)

(223)

14

0

0

0

Closing net debt/(cash)

 

 

6,155

1,654

10,225

2,728

15,531

6,236

Source: Edison Investment Research, Treattounts

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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 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 Investment Research Pty Limited (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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

295 Madison Avenue, 18th Floor

10017, 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

295 Madison Avenue, 18th Floor

10017, 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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 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 Investment Research Pty Limited (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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

295 Madison Avenue, 18th Floor

10017, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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