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Sweet upgrades

Treatt 18 May 2021 Outlook
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Treatt

Sweet upgrades

H121 results

Food & beverages

18 May 2021

Price

1,200p

Market cap

£718m

Net debt (£m) at 31 March 2021

5.1

Shares in issue

59.8m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.0

25.5

135.3

Rel (local)

3.1

19.6

87.4

52-week high/low

1,210p

485p

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 a particular emphasis on the beverage sector.

Next events

Year-end trading update

September 2021

Full year 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 demonstrated the strength of its business model, with another excellent set of results, and yet another upgrade to guidance. The performance continues to be testament to the management and culture of the business, which has been transformed under CEO Daemmon Reeve’s nine years at the helm. Both sales and profit performance are impressive, and we once again raise our forecasts, as the ‘healthier’ categories continue to outperform. The relocation of the UK business is under way, and we expect the business to continue to perform well once the new UK capacity comes on stream.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/19

112.7

14.0

19.0

5.5

63.0

0.5

09/20

109.0

15.8

21.3

6.0

56.3

0.5

09/21e

127.5

21.7

29.5

8.5

40.7

0.7

09/22e

135.2

23.6

32.0

9.2

37.4

0.8

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

Impressive H121 growth, forecasts raised

H121 revenues were up 13.5%, with the ‘healthier’ categories of tea, health & wellness and fruit & vegetables up 57% during the period. Gross margins were up an impressive 880bp, and adjusted profit before tax was up 71% to £10.4m. We raise our forecasts in light of the extremely strong results, and the updated outlook of FY21 adjusted PBT to be ‘at least £20.0m’. We raise our sales forecasts by 3.5% for FY21–23 and our adjusted PBT and adjusted EPS forecasts move up by c 10%.

Growth to continue

Treatt has transformed itself from a commodity-based ingredients trading house into a supplier of value-added ingredients and ingredient solutions. Treatt’s technical expertise is being applied across a growing range of applications and is enabling it to move up the value chain, most recently in the citrus category, for example in the hard seltzers category. In turn, this has led to both revenue growth and margin expansion, and we expect this to continue over the next few years.

Valuation

Treatt trades at 40.7x and 28.1x FY21 P/E and EV/EBITDA, representing premiums of c 30% and c 40% respectively to its peers. We note that the current share price is discounting medium-term sales growth of 5.0%, falling to 2.5% in perpetuity, with a WACC of 5.7% and a terminal EBIT margin of 20.0%. We forecast net debt at end FY21, moving to a net cash position thereafter, and hence expect a significant uplift in the dividend in FY21.

Investment summary

Company description

Treatt provides ingredients and ingredient solutions both to the flavours and fragrance industries, and directly to global fast-moving consumer goods (FMCG) manufacturers. The beverages space (c 65–70% of sales) has proved to be the fastest-growing segment for the company over the past few years, in particular health and wellness, citrus, ready-to-drink (RTD) tea flavours and fruit and vegetable clean-label extracts. Treatt’s in-depth knowledge of the commodities markets in which it operates (non-exchange-traded) and its long-term relationships with suppliers provide the group with an important competitive advantage.

Valuation: Reflects the growth potential

Over the last 12 months, the share price has risen c 130% in both absolute and relative (FTSE All-Share) terms, while over the last three months these figures are 9% and 0% respectively. The company trades at a premium to its larger peers based on benchmark valuation metrics. We calculate that the current share price is discounting medium-term sales growth of 5.0%, falling to 2.0% in perpetuity, with a WACC of 5.7% and a terminal EBIT margin of 20.0%. A terminal growth rate of 2.5% would result in a fair value of 1,208p/share.

Treatt trades at a premium to its larger ingredients peers on both P/E and EV/EBITDA multiples. It trades at 40.7x and 28.1x FY21 P/E and EV/EBITDA, representing premiums of c 30% and c 40% respectively to its peers.

Financials

Treatt’s revenues during H121 were up 13.5% (16.2% at constant currency), with the ‘healthier’ categories of tea, health & wellness and fruit & vegetables up 57% during the period. Adjusted profit before tax was up 71% to £10.4m. To satisfy consumer preferences for increasingly cleaner labels and healthier products, the ‘healthier’ categories witnessed an acceleration in growth. The core citrus product category reported revenues up 0.4%, but with other categories materially outpacing this, citrus represented 44% of sales in H121, from 50% in H120. Margins in the division recovered and were up an impressive 860bp owing to both a recovery in global citrus raw material prices, and Treatt’s constant shift into increasingly value-added (and hence higher-margin) ingredient solutions. Net debt stood at £5.1m at end H121, predominantly due to planned capital investment in the UK relocation project, although we forecast a net cash position from FY22 onwards and indeed an increase in dividend from FY21.

For the next three years (FY20–23) we forecast a 9.5% revenue CAGR and a 17.3% pre-exceptional PBT CAGR, translating to 20.8% growth in pre-exceptional earnings. This is roughly twice as fast as consensus earnings growth expectations for the peer group. The business is cash-generative, with a free cash flow yield of 3.0% in FY22 (once one-off project costs relating to the UK relocation cease).

Sensitivities

Treatt has a couple of key sensitivities, which it seeks to mitigate through the in-depth knowledge and skills base of its buying team and by employing an active hedging policy where possible:

Commodity exposure: namely citrus oils, which make up c 45% of revenues.

Foreign exchange: translation risk on US dollar profits, which it manages through hedging and transactional exposure as some raw materials are dollar denominated.

Company description

Founded over 130 years ago, Treatt combines deep expertise in flavours and fragrance solutions and its close relationship with customers to help them create appealing and innovative products. Treatt’s historical strength was in ingredient sourcing and risk management, but over time it has transformed itself into an innovative supplier of high-quality, value-added ingredient solutions. Around 75% of Treatt’s sales are now in the natural segment. Treatt’s customers consist of a balance between flavour and fragrance companies (54% of sales) and FMCG and other manufacturers (46% of sales). Its products are used by the former and blended to create highly value-added ingredients, which may be themselves sold to FMCG companies. In addition, some products are sold directly to FMCG and other players for use in their products. Sugar reduction (which is within the Health & Wellness category) and RTD tea have proved to be growth segments for the company over recent years.

Treatt has a wide customer base in terms of size and geographic spread. While over the years the business has focused on its larger customers, the breadth of its customer base means the group is not overly dependent on any one relationship, with its largest customer representing c 10% of sales and the top 10 customers representing c 48% of sales. Approximately 80% of Treatt’s product portfolio is flavour ingredients, which are mostly used in the beverages space. The remaining 20% of the portfolio encompasses fragrance ingredients. Typical end products that use Treatt ingredients range from soft drinks including mixers, alcoholic beverages (including hard seltzers) and confectionery, to soaps, shampoos and basic pharmaceutical products. Treatt has manufacturing sites in the UK and US, in which its two 100%-owned subsidiaries, RC Treatt and Treatt USA, are principally based. In addition to its manufacturing centres, Treatt is in the process of establishing a wholly owned subsidiary in China, it has a sales office in India and a network of agents throughout the world, through which it exports to more than 90 countries worldwide.

Treatt has evolved from a commodity-based ingredient trading house into a supplier of value-added ingredients. This has brought substantial sales growth and higher margins, and helped to decouple the business performance from fluctuations in raw material pricing. We expect margins improvement to remain a feature as Treatt continues to move up the value chain, particularly in the Citrus and Synthetic Aroma categories.

Over the last few years, Treatt has embarked on substantial capacity expansion. It first expanded its capacity in the US. This work was completed in FY19 and added 60,000sq ft of space, and doubled capacity in the three categories of tea, health & wellness (including sugar reduction), and fruit & vegetables. The expansion took into account future needs and there is c 40,000sq ft of additional space to further increase capacity in the long term, with an extra six acres of space bought very recently. Treatt’s UK relocation has been a larger project: in May 2015, the company first announced its intention to fully relocate the business to another site near the existing one. The head office move is under way, and the new site should be commissioned in calendar H122. This will allow the business to continue to grow and to capitalise on the opportunities in its faster-growing and higher-margin categories such as tea, coffee and the complex ingredients solutions required in alcoholic seltzers.

Exhibit 1: Continuing revenue by geography (FY20)

Exhibit 2: Revenue by product category (FY20)

Source: Treatt

Source: Treatt

Exhibit 1: Continuing revenue by geography (FY20)

Source: Treatt

Exhibit 2: Revenue by product category (FY20)

Source: Treatt

Flavour and fragrance ingredients are part of an extensive range produced and supplied by Treatt for its customers. Treatt has six segments in which it operates: citrus; health and wellness; tea; fruit and vegetable; herb, spice and floral; and synthetic aroma, with coffee soon to be added as a standalone seventh segment. Treatt collaborates closely with its customers to develop an ingredient solution for a particular problem or new product. Treatt’s specialists will still help their customers to find the ideal ingredient and are constantly developing new ones.

Within flavours, Treatt has four key areas of focus: citrus, tea, fruit and vegetables, and health and wellness. Citrus has been a historical area of strength and expertise for Treatt, while health and wellness (mainly sugar reduction), fruit and vegetables, and tea have exhibited strong growth over the last few years as they are in the sweet spot of current consumer demand for healthy products that do not compromise on taste or convenience. Treatt has dedicated resources to these four leading product categories to increase their success, without leaving behind the rest of the business. As Treatt has moved its citrus business away from the more commoditised end and into higher-margin, value-added solutions, volumes have been lower. In the H1 21 results, therefore, citrus revenues were broadly flat despite the raw material-led recovery in pricing. Beverages remain Treatt’s main area of expertise as liquid flavourings are most often used in beverages. The company now derives around 65–70% of its revenues from the beverage industry (including ingredients that are sold on to the beverages industry via flavour houses). The high-impact and aroma (synthetic) flavours business continues to contribute to the group overall (it accounts for c 20% of revenues), but generally at a somewhat lower margin.

Exhibit 3: Treatt revenue by route to market (FY20)

Source: Treatt

Treatt has navigated the COVID-19 pandemic admirably and has been seemingly unaffected in terms of trading performance. This is in part owing to the categories in which Treatt operates, with many of its products used in categories that did not see a drop in demand. For example, the beverages market has witnessed a switch from the on-trade to the off-trade channel as restrictions have been imposed globally. For beverage companies, this has typically resulted in margin erosion, whilst for the flavour industry the more important metric is overall volume consumed, and Treatt has witnessed an overall increase in demand for its products.

Industry overview

The food and beverage industry is constantly evolving and the pandemic has only served to accelerate and accentuate some pre-existing trends, particularly the focus on health. Over the last few years, one of the more significant trends has been for natural, clean-label, calorie-free and sustainable products. Consumers demand these product features, causing the market for natural and naturally derived products to accelerate in growth, and creating significant profit potential for both food and beverage manufacturers and ingredients suppliers. The products are highly desirable but also require a significant degree of complexity and know-how to formulate and use, thus giving rise to higher margins. Consumers are increasingly questioning product claims and demanding more bespoke products.

Consumers currently perceive natural ingredients as having a positive effect on general health, while synthetic ingredients are viewed less positively – though there is currently a debate in the industry with regards to the sustainability and resource-intensity of natural ingredients. As a result, food and beverage manufacturers have promptly responded to the situation by completely or partially replacing synthetic ingredients with their natural or clean-label counterparts. Consumers are increasingly shying away from certain food groups and avoiding products that are viewed as overly processed. Similarly, within the personal care space, consumers are eschewing the larger brands in favour of more niche, sustainable and natural products. The larger FMCG manufacturers have sought to embrace this trend by both reformulating products with cleaner labels, and buying out smaller, niche brands with more organic/natural credentials.

A common problem in the wellness space is that the better-for-you variants often have a compromised taste. To keep taste as close as possible to the regular product, complex formulations take centre stage and may require an ongoing iterative process to optimise the taste. For example, stevia is an increasingly popular 100% natural sweetener; however, it is also renowned for a signature bitter liquorice aftertaste. Treattaromes are Treatt’s trademark From the Named Food (FTNF) portfolio of clear aqueous distillates that naturally offset the aftertaste. They provide a natural sweet top-note flavour and are an exciting potential way for Treatt to participate in this fast-growing sector of the beverage market.

Another significant trend in the FMCG space has been the willingness of consumers to trade up in certain specific segments, where they perceive a benefit. For example, alcoholic drinks mixers used to be a low-value proposition, but over the last few years consumers have started to take more note, and hence want seasonal specialties, new profiles and high-quality blends that can also be consumed without alcohol. Treatt’s expertise in sugar reduction and natural flavours can help its customers to reformulate an existing beverage to improve it, or launch a new product, all without affecting taste.

Sustainability and consumer ethics has also been emerging as a new trend, with mindful consumers opting for products that are good for them and better for the world around them. Treatt’s stable and traceable supply chains across its product categories can help deliver accountability to its customers.

We believe Treatt is in an excellent position to benefit from the constant need for FMCG manufacturers to produce a stream of new product formulations to keep consumers engaged, particularly given its focus on deep customer knowledge and relationships, thus enabling it to work closely with its clients. It is also well placed to capitalise on the natural and clean-label trends given its expertise in FTNF solutions.

Strategy

Treatt has transformed itself from a trading house to a provider of value-added, technical flavour and fragrance solutions. It seeks to build close, mutually beneficial relationships with its customers across as many touch points as possible.

Treatt’s strategy has evolved but its underlying aim is to create outstanding sustainable ingredients solutions, designed around its customers’ needs. In turn, this should result in the delivery of long-term and consistent growth in profitability. Treatt’s strategic priorities are to:

Invest in its core categories, where it is recognised by customers for its expertise.

Diversify into new categories to continue broadening the portfolio, for example by building capability in hard seltzers and in cold brew coffee.

Investing for future growth, with the recent expansion in the US and a move to new UK headquarters under way during calendar year 2021.

Invest in its culture: people and culture are considered important assets and the key to enabling the priorities set out above, thus Treatt has consistently invested in its culture.

Reduce environmental impact: Treatt is developing a formal ESG strategy to build on the strong capabilities already embedded in the business. Its drive to reduce its environmental impact has already yielded significant cost efficiencies.

Engage with its communities by undertaking a wide range of fundraising and volunteering activities.

Over the past few years, Treatt has invested heavily in how it uses market insights across its business, with a view to becoming more agile. Its marketing department has increased its scope in data gathering and analysis and the company has improved how the information is shared around the business. The commercial functions have come closer together and work in partnership with category managers to unlock more effective and targeted marketing.

Geographical split

Treatt runs its business by category but its sales effort is run by geography. Over the years it has increasingly strived to bring its people together and share knowledge globally. As part of its focus on culture and employee engagement, employees in each of the product categories are encouraged to share information and best practices globally. The US is Treatt’s largest and most dynamic market: it lends itself perfectly to Treatt’s clean-label proposition, as consumers increasingly demand healthier and more natural products. The Asian market has witnessed extremely fast growth over the past few years. As discussed below, the well-known trends of increasing affluence and urbanisation have driven growth in the underlying ingredients space. Treatt opened a sales office in China several years ago to capitalise on the growth opportunity, and in FY20 China contributed 6.3% to revenue versus the UK’s 6.8%. North America and Europe (including the UK) still represent 68% of overall sales.

UK and Europe

These are diverse and evolving markets, which present a number of opportunities as several trends continue to gain traction. In general, Europe continues to follow trends first seen in North America, with innovation in functional beverages, low- and no-alcohol beverages, and RTD coffee. Hard seltzers have been a clear success story in the US and this exciting category is now growing across the UK and Europe. Germany and Spain currently make up 30% of Europe’s zero alcohol beverage market.

Reduction in sugar levels continues to be a major trend, with consumers shifting their preferences towards ‘better-for-you’ products. New brands are establishing their credentials as natural, sugar free and ethical/sustainable and more established brands continue to reformulate to compete more effectively, stay relevant and avoid sugar levies and taxes. Treatt’s increasingly large portfolio of 100% natural sugar reduction solutions allows its customers to reduce sugar levels while maintaining a clean label, and not having a dramatic impact on taste.

North America

During the pandemic, most large FMCG manufacturers have reported that the US market has witnessed a marked consumer desire for clean-label beverages with functional ingredients. Consumers are increasingly demanding healthier products as links are found between COVID-19 and obesity-related diseases. Consumers are also continuing to reduce their alcohol consumption, and driving growth in the low- and no-alcohol beverage space. Treatt has been particularly successful in the hard seltzers segment, which has seen significant growth over the past 18 months. The North American non-alcoholic beverage market is predicted to be worth $280.5bn in 2021, and is expected to grow at 6.9% CAGR 2020–2025 (source: Statista).

Asia

China is increasingly a focus as the rising affluence of the middle classes and urbanisation trends drive growth in the Asian beverages industry. The Chinese market is also witnessing an increase in health-conscious consumers, which has driven an expansion of the non-alcoholic drinks market. The non-alcoholic beverage segment was worth $36.5bn in 2020 and is expected to grow by 7.2% per annum (source: Statista). RTD tea and coffee continue to increase in popularity, as well as performance-based beverages with functional ingredients.

Product categories

Treatt has identified the categories of citrus, tea, health and wellness, and fruit and vegetables as key drivers of growth, given their size and Treatt’s expertise. This is to better serve its customers and to concentrate on the higher-growth and higher-margin opportunities within the business. During H121, the fastest-growing category was tea, which was up 93% versus H120, and over the next few years it should be able to continue to build market share as it benefits from the increased manufacturing capacity at Treatt’s US facility. We briefly set out the six main categories in turn below. Coffee features as a separate category, although it is not expected to become material for at least two to three years given Treatt’s recent entry into the segment.

Citrus

This is Treatt’s largest category. It has a long history of expertise in citrus, which has been a core part of its business for many decades. The taste for citrus flavours (both natural and synthetic) remains a winner in the beverage industry and is often used to encourage consumers to try new or exotic flavours, as they can be paired with the more traditional orange, lemon or lime flavours. Brands can emphasise the natural citrus flavour together with its provenance. Citrus also has the advantage of working well in most beverage categories, from juices and flavoured waters to sparkling drinks, hard seltzers, and teas. Treatt maintains long-term relationships with citrus growers and processors across more than 10 countries to provide a stable and sustainable supply and to smooth out some of the pricing volatility – as witnessed during FY19 and FY20, this can be material – which also helps Treatt’s customers.

Tea

Tea is the second most widely consumed beverage worldwide, after water. All teas essentially come from the same plant; it is the processing method that gives each tea its distinctive properties. Tea is popular in different forms depending on geography, but RTD tea in particular continues to grow globally. Tea has a broad appeal and embraces the current consumer trends of low-sugar, natural products that have additional health benefits. Tea can be niche, premium or every day, giving Treatt a wide spectrum in which to operate, and indeed over the last year it has benefitted from wins at multiple FMCG customers and flavour and fragrance houses.

Health and wellness

Reducing sugar levels and calories in both food and drink is a global trend that is being driven by increasing consumer awareness of the detrimental effects of sugar on health. The food and drink industry as a whole has been reformulating its product ranges as sugar reduction concerns have become more prevalent and sugar taxes and levies have been introduced. The key concern, however, is not to have a detrimental effect on taste. Sugar reduction is also technically complicated, which is where Treatt’s expertise comes in. Sugar provides flavour, sweetness and texture/mouth feel. Treatt operates principally in the niche of flavour, which is difficult to replicate, but is essential to low-calorie product propositions. Over the last year Treatt has witnessed new business wins with global FMCGs in this space.

Fruit and vegetables

Providing natural fruit and vegetable flavours to food and beverages or fragrance to home and personal care items is another capability that taps into the current consumer trend for more natural products with clean labels. Treatt’s fruit and vegetable flavour range is comprised of highly concentrated aqueous distillates. They are 100% natural and are distilled for shorter time periods at lower temperatures to maximise flavour. Their concentration results in them being extremely effective even at lower dosages.

Herbs, spices and florals

Premium beverages come in a range of flavours and floral, herbed and spiced flavours have gained in popularity as consumers experiment with new and exotic flavours, particularly at the premium end of the spectrum. Treatt sources, manufactures and supplies over 500 herb, spice and floral products. They are 100% natural ingredients, made FTNF. Treatt works closely with its customers to match specific requirements. Products include essential oils such as peppermint and lavender, and are used in a diverse range of applications such as alcohol free, or flavoured spirits.

Synthetic Aroma

High-impact aroma chemicals are ideal for creating powerful flavours and fragrances and often offer a low-cost solution at low dosage. Treatt has an extensive range of speciality high-impact aroma chemicals and a long history in the space. Treatt’s ability to deliver a consistent and quality service in this space stands it apart from other players.

Coffee

Coffee is one of the quickest-growing beverage categories in the world and, like tea, it is the processing method (blending and roasting) that gives each coffee its distinctive properties. Coffee has grown consistently as a beverage over the last decade, with an ever-increasing choice of variants and formats. In its H1 results announcement, Treatt confirmed it continues to build up its coffee platform, with plans progressing to develop UK production capability to provide greater agility in servicing UK and European markets (as current capabilities are solely in the US). Treatt expects the coffee segment to make a meaningful contribution to profits in the medium term, once it has had an opportunity to build scale. Its experts can craft blended solutions that take account of taste profile, naming, regional requirements and desired caffeine levels, thus enabling Treatt to deliver stand-out products in this diverse yet crowded market.

Culture

One of the more fundamental changes that CEO Daemmon Reeve and CFO Richard Hope have enacted is the significant cultural change they have made to the business since it was remodelled in 2012. Treatt recognises that a well-motivated and experienced workforce will be more successful and an important part of its strategy is to continuously enhance the engagement of its employees. Over the last decade, internal structures have been constantly improved to ensure collaboration across the business. The culture of openness, innovation and collaboration attracts and retains the brightest candidates and Treatt offers a tailored training and development programme to help individuals reach their full potential.

Engagement with local communities has resulted in Treatt being widely recognised as a desirable employer and a business committed to community responsibility. By fostering a culture of innovation, the company regularly sees cross-departmental teams coming together and identifying new opportunities to grow and improve efficiency.

Treatt’s focus on culture has really come to the fore during the pandemic: it put the wellbeing of its employees as its top priority and protected the safety of staff that remained on site. It also continued with its community support work, for example by producing hand sanitiser for local care homes.

Financial targets

Treatt’s prior medium-term financial targets (as of the FY20 results, reported in November 2020) were a net operating margin of 15% ROCE of 20–25% after the infrastructure and investment phase, and FCF target cash conversion ratio >60% over the next five years.

Given the strong H121 results, and the updated FY21 guidance that adjusted PBT will be at least £20m, we forecast FY21 net operating margin of 16.0%, hence above the company’s own medium-term target.

Over the medium to long term, the evolution of the portfolio towards higher value-added technical ingredient solutions suggests gross margins should continue to rise. We forecast a gross margin improvement of 30bp per year between FY22 and FY24.

Treatt’s commitment to contain fixed costs remains clear and management now views an EBIT margin of at least 20% as achievable in the medium term, versus our forecast of 16.0% for FY21, rising to 16.9% by FY24. The relatively slow growth is as a result of an increasing depreciation charge over the period, as the US expansion and new UK facility start to be depreciated. Over the medium term we forecast an operating margin improvement of 40bp pa.

In Exhibit 4 we illustrate Treatt’s EBITDA and operating margin over FY15–FY24e. We can see a broadly steady improvement FY15–FY19 despite the economic and raw materials cycles that occurred over the period, before the material improvement witnessed during FY20 and being experienced in FY21.

Exhibit 4: Treatt EBITDA and operating margin FY15–FY24e

Source: Edison Investment Research, company data

Sensitivities

Commodity exposure

Due to its background as a trader in raw material ingredients and the breadth of the product range it offers to customers, Treatt is exposed to a wide range of commodities. In general, this means that fluctuations in commodity prices tend to even out across the portfolio as a ‘natural hedge’. The exception, however, is the group’s sizeable exposure to citrus oils, mainly orange and lemon. In the event of a price spike across all commodities, the ingredients space has generally shown some resilience and has demonstrated some pricing power, as flavours represent a tiny portion of raw material costs for its clients (the consumer companies), which have therefore been more accommodating with price increases. Again, however, the value-added end of the spectrum has more pricing power.

Citrus oils

Citrus oils represent c 50–55% of Treatt’s raw materials expenditure. Orange oil is a non-exchange-traded commodity, so its supply is managed by Treatt’s highly skilled stock teams in the US and UK, with their deep market knowledge and expertise adding value to customers by consistently ensuring best prices and consistency of supply.

A total of 95% of Treatt’s supply of orange oil comes from two key markets – Brazil and Florida. Orange oil is a by-product of orange juice, extracted through centrifugation. Despite being a by-product, there is no direct relationship between the price of orange oil and the publicly traded price of orange juice. This is because the key determinant of price is not simply the quantity of fruit grown in any one growing season, but rather the complex interaction of a number of influences, driven in the main by the amount of fruit the processors need to buy to produce the quantities of juice they need to satisfy demand.

Prices are down significantly since the elevated levels of 2017 (when prices peaked at $12/kg vs the long-term average of $4–6/kg) and are around $7/kg. Having softened through FY19 and the start of H120, but since recovered since, management is expecting citrus oil prices to be more stable.

The group’s deep insight into the markets of both commodities has very clearly helped it navigate the worst of the volatility during FY19 and FY20 and gives a significant value-added service to customers who may not have a similar level of insight. Increasingly, Treatt has secured longer-term contracts from both customers and suppliers to smooth out volatility in raw material procurement and revenues, with the aim of reducing volatility in group gross margin.

Foreign exchange

The principal foreign exchange risk is sterling/US dollar, which affects the company from both a transactional and a translational point of view:

Transactional: raw materials (including orange oil) are mainly purchased in US dollars, thus affecting the cash values of sales and the gross margin if subsequently sold in a different currency. Movements in the US dollar can also affect the replacement cost of stock, which can and does have an impact on profitability as well as competitiveness.

Translational: sales are made to more than 90 countries, thus fluctuation in the sterling exchange rate can affect reported revenues, gross profit and operating costs.

To try to mitigate the main sterling/US dollar exposure, the company takes out forward FX contracts to hedge the risk.

Valuation

We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 5 below. Treatt trades at 40.7x and 28.1x FY21 P/E and EV/EBITDA, representing premiums of c 30% and c 40% respectively to its peers. We forecast FY20–23 adjusted EPS CAGR of 20.8%, which is roughly twice as fast as consensus earnings expectations for Treatt’s peer group over the same period.

Exhibit 5: Comparative valuation

Market cap
(m)

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

2021e

2022e

2021e

2022e

2021e

2022e

Givaudan

CHF 35,605

39.4

36.2

26.3

25.1

1.7

1.8

IFF

$35,150

23.8

21.3

18.0

15.8

2.1

2.2

Symrise

CHF 14,220

39.1

35.7

19.6

18.3

1.0

1.1

Chr Hansen

DKK 72,967

46.2

39.6

29.2

26.3

1.8

1.5

Kerry

€ 19,093

28.2

25.4

19.4

18.0

0.9

1.0

Ingredion

$6,479

14.8

13.7

8.8

8.4

2.7

2.7

Peer group average

34.3

31.9

25.9

20.2

1.4

1.7

Treatt

£718.1

40.7

37.4

28.1

23.7

0.7

0.8

Premium/(discount) to peer group (%)

27.5%

30.8%

38.9%

27.3%

(58.7%)

(55.7%)

Source: Refinitiv, Edison Investment Research. Note: Priced at 17 May 2021.

We have rolled over our DCF to start in 2022, given we are more than halfway through 2021. The current share price is discounting medium-term sales growth of 5.0%, falling to 2.5% in perpetuity, with a WACC of 5.7%. We illustrate a sensitivity analysis in Exhibit 6 below. We note that our FY21 EBIT margin forecast is 16.0%, and our terminal EBIT margin assumption is 20.0%. As discussed above, we forecast operating margin of 16.0% for FY21, rising to 16.9% by FY24. The relatively slow growth is a result of an increasing depreciation charge over the period, as the US expansion and new UK facility start to be depreciated. Over the medium term, we forecast an operating margin improvement of 40bp per year as the business continues to move to more value-added solutions, and the efficiency benefits of the new UK site feed through into the operating numbers.

Exhibit 6: DCF sensitivity to terminal growth rate and EBIT margin (p/share)

EBIT margin

18.0%

19.0%

20.0%

21.0%

22.0%

Terminal growth

1.0%

841

876

911

947

982

1.5%

908

947

987

1,026

1,066

2.0%

992

1,037

1,082

1,127

1,172

2.5%

1,104

1,156

1,208

1,260

1,312

3.0%

1,257

1,318

1,380

1,441

1,503

3.5%

1,479

1,555

1,630

1,706

1,782

Source: Edison Investment Research

Financials

H121 results

H121 revenues were up 13.5% to £60.8m, in line with guidance given at the latest trading update, in April. Gross margin was up an impressive 880bp. This was in part driven by the recovery in citrus raw material pricing and it was helped by evolution in the overall citrus category, with more sophisticated flavours and fragrances becoming more prevalent. In addition, the gross margin improvement was also driven by Treatt’s deliberate shift towards more value-added products, which are inherently higher margin. Adjusted profit before tax was up 71.4% to £10.4m and adjusted EPS was up 60% to 12.93p.

The key natural and ‘healthy living’ product categories of fruit and vegetable, tea, and health and wellness all performed strongly. Citrus, the largest category, grew a modest 0.4% in revenue as prices steadily and slowly recovered from their H120 lows, although as Treatt has moved away from the more commoditised applications in the category, volumes have fallen. The synthetic aroma segment experienced revenues up 16.1% during H121. The herbs, spices and florals segment reported revenues down 13.3% during H121. The decline in this particular segment was caused by lower demand in the beverage category, predominantly caused by the temporary closure of the hospitality segment, while demand in other segments was supported by consumers switching from the on-trade to the off-trade.

The US and China continue to be key strategic markets for Treatt. The US witnessed strong growth of 31.5% at constant currency versus the prior period. UK revenue was up 21.6%, while revenue in Europe (excluding the UK) grew 17.8% at constant currency, despite the challenge of the increase in shipment lead times as a result of Brexit.

Net debt stood at £5.1m at the end of H121 and year-end net debt guidance is £6–8m as costs of the UK relocation continue to be incurred, as planned. Treatt holds a relatively high inventory position, but this helps it counter any sudden or seasonal fluctuations in its raw material costs. We forecast net cash from FY22 onwards, and indeed forecast a significant increase in dividend from FY21 onwards to reflect the strong balance sheet.

We raise our forecasts in light of the improved outlook and guidance. We illustrate our changes in Exhibit 7.

Exhibit 7: Old versus new key P&L forecasts

EPS (p)*

PBT* (£000s)

Revenue (£000s)

Old

New

% change

Old

New

% change

Old

New

% change

FY21e

24.3

27.3

12.7

18,149

20,450

12.7

123,188

127,549

3.5

FY22e

27.0

29.5

9.6

20,168

22,099

9.6

130,579

135,202

3.5

FY23e

29.9

32.0

6.7

22,398

23,906

6.7

138,414

143,314

3.5

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

Exhibit 8: Financial summary

£000's

2018

2019

2020

2021e

2022e

2023e

2024e

Year end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

112,163

112,717

109,016

127,549

135,202

143,314

151,913

Cost of Sales

(84,407)

(84,060)

(77,140)

(88,723)

(93,641)

(98,830)

(104,304)

Gross Profit

27,756

28,657

31,876

38,826

41,561

44,484

47,609

EBITDA

 

 

16,627

15,785

17,862

25,563

30,223

32,224

34,371

Operating Profit (before amort., except and SBP)

 

 

15,108

14,226

16,053

21,750

23,596

25,461

27,465

Intangible Amortisation

(124)

(90)

(75)

(64)

(54)

(46)

(39)

Share based payments

(1,040)

(637)

(886)

(1,222)

(1,444)

(1,562)

(1,686)

Other

0

0

0

0

0

0

0

Operating Profit

13,944

13,499

15,092

20,464

22,097

23,853

25,740

Net Interest

(1,302)

(199)

(291)

(14)

2

53

53

Exceptionals

(1,105)

(755)

(1,060)

(1,400)

0

0

0

Profit Before Tax (norm)

 

 

13,806

14,027

15,762

21,736

23,597

25,514

27,517

Profit Before Tax (FRS 3)

 

 

11,537

12,545

13,741

19,050

22,099

23,906

25,792

Profit Before Tax (company)

 

 

12,642

13,300

14,801

20,450

22,099

23,906

25,792

Tax

(2,284)

(2,673)

(2,896)

(4,090)

(4,420)

(4,781)

(5,158)

Profit After Tax (norm)

11,392

11,263

12,762

17,646

19,178

20,733

22,359

Profit After Tax (FRS 3)

9,253

9,872

10,845

14,960

17,679

19,124

20,634

Discontinued operations

2,976

(1,084)

0

0

0

0

0

Average Number of Shares Outstanding (m)

56.8

59.1

59.8

59.8

59.8

59.8

59.8

EPS - normalised (p)

 

 

20.1

19.0

21.3

29.5

32.0

34.6

37.4

EPS - adjusted (p)

 

 

18.0

17.8

19.7

27.3

29.5

32.0

34.5

EPS - (IFRS) (p)

 

 

16.3

16.7

18.1

25.0

29.5

32.0

34.5

Dividend per share (p)

5.1

5.5

6.0

8.5

9.2

9.9

10.7

Gross Margin (%)

24.7

25.4

29.2

30.4

30.7

31.0

31.3

EBITDA Margin (%)

14.8

14.0

16.4

20.0

22.4

22.5

22.6

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

13.5

12.6

14.7

17.1

17.5

17.8

18.1

Operating Margin (%)

12.4

12.0

13.8

16.0

16.3

16.6

16.9

BALANCE SHEET

Fixed Assets

 

 

21,863

31,730

54,048

62,912

61,758

62,099

62,432

Intangible Assets

752

845

1,358

1,294

1,240

1,194

1,155

Tangible Assets

20,038

29,485

50,159

60,259

59,160

59,547

59,919

Investments

1,073

1,400

2,531

1,358

1,358

1,358

1,358

Current Assets

 

 

102,401

98,158

69,472

77,683

81,474

93,866

109,767

Stocks

39,642

36,799

36,050

41,923

44,168

46,532

49,020

Debtors

28,828

23,020

24,167

28,020

29,566

31,197

32,917

Cash

32,304

37,187

7,739

7,739

7,739

16,138

27,831

Other

1,627

1,152

1,516

0

0

0

0

Current Liabilities

 

 

(35,781)

(28,905)

(15,989)

(22,563)

(15,140)

(13,668)

(13,729)

Creditors

(16,479)

(11,784)

(12,640)

(13,440)

(13,571)

(13,668)

(13,729)

Short term borrowings

(19,244)

(16,860)

(3,203)

(9,123)

(1,570)

0

0

Provisions

(58)

(261)

(146)

0

0

0

0

Long Term Liabilities

 

 

(6,858)

(13,876)

(16,411)

(18,322)

(14,346)

(13,361)

(13,161)

Long term borrowings

(3,001)

(4,369)

(3,450)

(4,561)

(785)

0

0

Other long term liabilities

(3,857)

(9,507)

(12,961)

(13,761)

(13,561)

(13,361)

(13,161)

Net Assets

 

 

81,625

87,107

91,120

99,709

113,745

128,936

145,309

CASH FLOW

Operating Cash Flow

 

 

3,580

20,544

15,677

15,235

26,363

28,128

30,023

Net Interest

(609)

(199)

(191)

(14)

2

53

53

Tax

(2,978)

(2,208)

(2,191)

(4,090)

(4,420)

(4,781)

(5,158)

Capex

(6,190)

(10,392)

(23,909)

(13,913)

(5,528)

(7,150)

(7,279)

Acquisitions/disposals

8,357

855

(1,041)

0

0

0

0

Financing

21,090

622

(69)

0

0

0

0

Dividends

(2,876)

(3,080)

(3,378)

(3,590)

(5,086)

(5,497)

(5,946)

Net Cash Flow

20,374

6,142

(15,102)

(6,372)

11,330

10,753

11,693

Opening net debt/(cash)

 

 

10,225

(10,059)

(15,958)

(427)

5,945

(5,385)

(16,138)

HP finance leases initiated

0

0

0

0

0

0

0

Other

(90)

(243)

(429)

(0)

0

0

0

Closing net debt/(cash)

 

 

(10,059)

(15,958)

(427)

5,945

(5,385)

(16,138)

(27,831)

Source: Edison Investment Research, company data

Contact details

Revenue by geography

Northern Way
Bury St Edmunds
IP32 6NL
UK
+44 (0)1284 702500
www.treatt.com

Contact details

Northern Way
Bury St Edmunds
IP32 6NL
UK
+44 (0)1284 702500
www.treatt.com

Revenue by geography

Management team

CEO: Daemmon Reeve

CFO: Richard Hope

Daemmon Reeve has extensive industry experience and knowledge, having worked at RC Treatt in the UK from 1991–2010, gaining widespread experience across technical, operational and sales and purchasing disciplines. In July 2010, he was appointed CEO of Treatt USA and became Group CEO in July 2012. In August 2019 Daemonn was awarded an honorary doctorate by the University of Suffolk.

Richard Hope was appointed group finance director in May 2003, having been head of finance at Hampshire Cosmetics between 1996 and 2003. He is a qualified chartered accountant and was certified a Fellow of the Institute of Chartered Accountants in England and Wales in 2010. He was awarded Finance Director of the Year at the 14th Grant Thornton Quoted Company Awards in February 2018.

Management team

CEO: Daemmon Reeve

Daemmon Reeve has extensive industry experience and knowledge, having worked at RC Treatt in the UK from 1991–2010, gaining widespread experience across technical, operational and sales and purchasing disciplines. In July 2010, he was appointed CEO of Treatt USA and became Group CEO in July 2012. In August 2019 Daemonn was awarded an honorary doctorate by the University of Suffolk.

CFO: Richard Hope

Richard Hope was appointed group finance director in May 2003, having been head of finance at Hampshire Cosmetics between 1996 and 2003. He is a qualified chartered accountant and was certified a Fellow of the Institute of Chartered Accountants in England and Wales in 2010. He was awarded Finance Director of the Year at the 14th Grant Thornton Quoted Company Awards in February 2018.

Principal shareholders

(%)

BlackRock Investment Management (UK) Ltd.

9.79

Liontrust Asset Management PLC

4.37

Canaccord Genuity Wealth Management

4.30

Rights and Issues Investment Trust

4.15

Hargreaves Lansdown Asset Management Limited

3.75

James Sharp

3.14


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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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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