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Research: Consumer
Treatt has delivered yet another strong set of results. The business continues to perform very well and the constant stream of upgrades demonstrates the strength of momentum as the company moves further up the value chain. The pipeline is looking increasingly strong and recent growth means capacity expansion costing $11-14m is required at Treatt USA and is independent of the UK site relocation. We upgrade our FY18 and FY19 earnings estimates by c 2% and c 4%, respectively.
Written by
Treatt |
A brilliant half |
H117 results |
Food & beverages |
9 May 2017 |
Share price performance
Business description
Next events
Analysts
Treatt is a research client of Edison Investment Research Limited |
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Treatt has delivered yet another strong set of results. The business continues to perform very well and the constant stream of upgrades demonstrates the strength of momentum as the company moves further up the value chain. The pipeline is looking increasingly strong and recent growth means capacity expansion costing $11-14m is required at Treatt USA and is independent of the UK site relocation. We upgrade our FY18 and FY19 earnings estimates by c 2% and c 4%, respectively.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/16 |
88.0 |
9.6 |
14.3 |
4.4 |
29.3 |
1.0 |
09/17e |
102.1 |
13.6 |
19.9 |
6.0 |
21.1 |
1.4 |
09/18e |
109.3 |
14.8 |
21.6 |
6.5 |
19.4 |
1.5 |
09/19e |
114.7 |
15.6 |
22.9 |
6.9 |
18.3 |
1.6 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Strategy delivering excellent results
Treatt’s long-term strategy is to deliver consistent, sustainable growth in profit through developing value-added ingredient solutions, coupled with effective cost control. Improved customer focus and closer relationships are a key part of this strategy, with the ultimate goal of delivering greater profitability by concentrating on the more value-added segments. This has been delivered consistently, with results often beating expectations, and momentum is now accelerating, with more frequent and more significant upgrades coming through. As a result of the H1 results, we upgrade our forecasts for 2018-19 to reflect the improved outlook and pipeline. Our sales forecasts move up c 2-3%, while PBT and EPS increase by c 2-5%, as Treatt’s move up the value chain should deliver a strong improvement in margins.
Momentum remains strong, US capacity expansion
H117 sales were 27% above those of the previous year. A stronger US dollar accounts for c 10% of this, but the remainder is due to impressive organic growth. H1 adjusted PBT was 63% higher than last year. Given the strength of the order pipeline, Treatt USA needs to expand its capacity. Management has announced it will commence work on the expansion in FY17 and it will cost $11-14m. We have updated our forecasts to reflect a $12m spend. The interim dividend is up 7%, and timing has been permanently brought forward to fall in H1. The ingredients space remains attractive, with higher than average growth compared to the wider consumer space. Margins are also typically high at the value-added end as these ingredients are highly specialised and deliver key attributes to the products.
Valuation: Fair value of 438p
Our DCF-derived fair value is 438p (previously 401p), c 5% upside to the current share price. The move is driven by our forecast upgrades and our increased confidence in the business given the positive momentum, which leads us to increase our medium-term sales growth assumption to 4.5% (from 3.5%).
Forecast revisions
We detail our key changes to P&L forecasts in Exhibit 1 below. We have left our main FY17 forecasts unchanged following our recent upgrade in April (detailed in our note). Our EPS change is purely as a result of updating our model for the slightly increased number of shares in issue (the stellar business performance has clearly resulted in a number of share schemes vesting). We have upgraded our FY18 and FY19 forecasts as Treatt is accelerating its move up the value chain, and order books for FY18 are accelerating, as confirmed by the news of the US capacity expansion. We continue to see potential for further upgrades. Improved sales growth should lead to operating leverage, and the move towards value-added products should continue to be beneficial to margins.
Exhibit 1: Old vs new key P&L forecasts
EPS* (p) |
PBT* (£000s) |
Sales (£000s) |
|||||||
Old |
New |
% change |
Old |
New |
% change |
Old |
New |
% change |
|
2017e |
18.0 |
18.0 |
-0.4% |
12,560 |
12,560 |
0.0% |
102,126 |
102,126 |
0.0% |
2018e |
19.2 |
19.5 |
1.9% |
13,353 |
13,660 |
2.3% |
107,233 |
109,275 |
1.9% |
2019e |
19.8 |
20.7 |
4.2% |
13,816 |
14,456 |
4.6% |
111,522 |
114,739 |
2.9% |
Source: Edison Investment Research. Note: *EPS and PBT are stated on a company normalised basis, which is pre-exceptional but after amortisation of acquired intangibles and share-based payments.
We assume the Treatt USA capacity expansion spend is $12m, split evenly between FY17 and FY18. This causes an increase in our FY17 net debt forecast from £1.0m to £5.6m, and our FY18 net debt moves from £11.2m to £16.7m. We note unutilised headroom in borrowing facilities was £16.4m at 31 March 2017, and we continue to expect both the UK relocation and the US expansion projects to be debt-funded. Management, however, has not ruled out equity funding for the UK site relocation, though a decision has not yet been made.
Exhibit 2: Financial summary
£000s |
2014 |
2015 |
2016 |
2017e |
2018e |
2019e |
||
Year end 30 September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
79,189 |
85,934 |
88,040 |
102,126 |
109,275 |
114,739 |
Cost of Sales |
(61,218) |
(66,955) |
(67,639) |
(76,623) |
(81,440) |
(85,283) |
||
Gross Profit |
17,971 |
18,979 |
20,401 |
25,503 |
27,835 |
29,456 |
||
EBITDA |
|
|
9,068 |
10,307 |
11,604 |
15,839 |
17,607 |
18,832 |
Operating Profit (before amort., except and sbp.) |
|
|
7,846 |
9,063 |
10,257 |
14,137 |
15,786 |
16,919 |
Intangible Amortisation |
(172) |
(175) |
(142) |
(160) |
(160) |
(160) |
||
Share based payments |
(46) |
(198) |
(566) |
(858) |
(933) |
(987) |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
7,628 |
8,690 |
9,549 |
13,119 |
14,693 |
15,772 |
||
Net Interest |
(724) |
(740) |
(703) |
(559) |
(1,033) |
(1,317) |
||
Exceptionals |
(1,402) |
(174) |
(553) |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
7,122 |
8,323 |
9,554 |
13,578 |
14,753 |
15,603 |
Profit Before Tax (FRS 3) |
|
|
5,502 |
7,776 |
8,293 |
12,560 |
13,660 |
14,456 |
Profit Before Tax (company) |
|
|
6,904 |
7,950 |
8,846 |
12,560 |
13,660 |
14,456 |
Tax |
(1,553) |
(1,786) |
(2,144) |
(3,203) |
(3,483) |
(3,686) |
||
Profit After Tax (norm) |
5,326 |
6,537 |
7,410 |
10,375 |
11,269 |
11,917 |
||
Profit After Tax (FRS 3) |
3,949 |
5,990 |
6,149 |
9,357 |
10,177 |
10,770 |
||
Average Number of Shares Outstanding (m) |
51.3 |
51.5 |
51.9 |
52.1 |
52.1 |
52.1 |
||
EPS - normalised (p) |
|
|
10.4 |
12.7 |
14.3 |
19.9 |
21.6 |
22.9 |
EPS - normalised & fully diluted (p) |
|
|
10.3 |
12.6 |
14.1 |
19.4 |
21.1 |
22.3 |
EPS - (IFRS) (p) |
|
|
7.7 |
11.6 |
11.8 |
18.0 |
19.5 |
20.7 |
Dividend per share (p) |
3.8 |
4.0 |
4.4 |
6.0 |
6.5 |
6.9 |
||
Gross Margin (%) |
22.7 |
22.1 |
23.2 |
25.0 |
25.5 |
25.7 |
||
EBITDA Margin (%) |
11.5 |
12.0 |
13.2 |
15.5 |
16.1 |
16.4 |
||
Operating Margin (before GW and except.) (%) |
9.9 |
10.5 |
11.7 |
13.8 |
14.4 |
14.7 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
13,777 |
13,381 |
16,161 |
26,951 |
45,071 |
48,219 |
Intangible Assets |
1,801 |
1,736 |
3,364 |
3,204 |
3,044 |
2,884 |
||
Tangible Assets |
10,994 |
10,998 |
11,361 |
22,311 |
40,591 |
43,899 |
||
Investments |
982 |
647 |
1,436 |
1,436 |
1,436 |
1,436 |
||
Current Assets |
|
|
43,590 |
45,045 |
54,435 |
51,913 |
53,873 |
55,279 |
Stocks |
28,020 |
25,799 |
29,990 |
31,214 |
32,306 |
32,774 |
||
Debtors |
14,509 |
17,635 |
17,853 |
20,199 |
21,066 |
22,005 |
||
Cash |
629 |
1,477 |
6,588 |
500 |
500 |
500 |
||
Other |
432 |
134 |
4 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(16,005) |
(13,481) |
(16,388) |
(20,877) |
(29,461) |
(27,352) |
Creditors |
(12,729) |
(12,675) |
(15,834) |
(16,817) |
(17,995) |
(18,894) |
||
Short term borrowings |
(2,356) |
(567) |
(487) |
(4,060) |
(11,466) |
(8,458) |
||
Provisions |
(920) |
(239) |
(67) |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(12,602) |
(11,760) |
(17,021) |
(11,342) |
(14,845) |
(13,141) |
Long term borrowings |
(7,857) |
(7,065) |
(7,755) |
(2,030) |
(5,733) |
(4,229) |
||
Other long term liabilities |
(4,745) |
(4,695) |
(9,266) |
(9,312) |
(9,112) |
(8,912) |
||
Net Assets |
|
|
28,760 |
33,185 |
37,187 |
46,644 |
54,638 |
63,005 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
3,528 |
8,667 |
10,804 |
14,736 |
16,625 |
18,125 |
Net Interest |
(724) |
(740) |
(703) |
(559) |
(1,033) |
(1,317) |
||
Tax |
(1,552) |
(1,469) |
(2,022) |
(3,203) |
(3,483) |
(3,686) |
||
Capex |
(538) |
(924) |
(679) |
(12,652) |
(20,101) |
(5,221) |
||
Acquisitions/disposals |
(208) |
(103) |
(861) |
0 |
0 |
0 |
||
Financing |
105 |
147 |
280 |
0 |
0 |
0 |
||
Dividends |
(1,899) |
(1,978) |
(2,095) |
(2,257) |
(3,116) |
(3,389) |
||
Net Cash Flow |
(1,288) |
3,600 |
4,724 |
(3,936) |
(11,109) |
4,512 |
||
Opening net debt/(cash) |
|
|
8,294 |
9,584 |
6,155 |
1,654 |
5,590 |
16,699 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
(2) |
(171) |
(223) |
(0) |
(0) |
0 |
||
Closing net debt/(cash) |
|
|
9,584 |
6,155 |
1,654 |
5,590 |
16,699 |
12,187 |
Source: Edison Investment Research, Treatt accounts
|
|
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