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Research: Consumer
Treatt has had yet another outstanding year, continuously exceeding expectations and meeting its 2020 strategic objectives three years early. The board has already approved a plan to drive the business through to 2022 that seeks to build on this success. We raise our EPS forecasts by 3% in FY17 to reflect the strong performance, though our FY18 and FY19 EPS estimates fall by 1-7% due to higher interest costs. Our DCF-derived fair value increases to 522p from 438p, which represents c 10% upside.
Written by
Treatt |
A full year Treat(t) |
FY trading update |
Food & beverages |
3 October 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 had yet another outstanding year, continuously exceeding expectations and meeting its 2020 strategic objectives three years early. The board has already approved a plan to drive the business through to 2022 that seeks to build on this success. We raise our EPS forecasts by 3% in FY17 to reflect the strong performance, though our FY18 and FY19 EPS estimates fall by 1-7% due to higher interest costs. Our DCF-derived fair value increases to 522p from 438p, which represents c 10% upside.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/16 |
88.0 |
9.6 |
14.3 |
4.4 |
34.0 |
0.9 |
09/17e |
108.7 |
14.0 |
20.6 |
6.2 |
23.6 |
1.3 |
09/18e |
116.3 |
14.6 |
21.3 |
6.4 |
22.7 |
1.3 |
09/19e |
122.2 |
14.5 |
21.3 |
6.4 |
22.8 |
1.3 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
An exceptional year
FY17 has been an impressive year for the company, with three separate upgrades to guidance. The growth rate achieved in FY17 (c 24% revenue growth, as per guidance) will be hard to replicate and should not be considered the new norm, but it does demonstrate the company is successfully embracing the sweet spot in flavour ingredients. Our net debt figures rise as working capital requirements are increasing (due to the impressive sales growth and also an increase in raw material prices). We now forecast £11m at end FY17, in line with guidance of £11-13m. We continue to base our assumptions on the expectation that both the UK relocation and the US expansion costs – which are progressing as planned – will be debt-funded, but acknowledge that management has not ruled out raising equity.
Ingredients space remains interesting
Growth in the ingredients space remains higher than average for the consumer sector as consumers demand cleaner labels and healthier products but will not compromise on taste; this requires specialist ingredients. Margins are also typically high at the value-added end. Treatt’s ingredient solutions are used both by food ingredients companies in their formulations, and by food and beverages companies directly. Treatt has placed particular emphasis on the beverages space and is becoming increasingly specialised in citrus, tea and sugar reduction.
Valuation: Attractive ingredients play
We value Treatt using a DCF model. We have rolled forward our model to commence in 2018, which, together with the increases to our operating forecasts, indicates a fair value of 522p (previously 438p), an attractive c 10% upside to the current share price. Treatt trades at 25x and 16.1x calendar P/E and EV/EBITDA multiples for 2018, representing discounts of c 9% and 22% to its ingredients peer group, respectively. 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.
Forecast revisions
We detail our key changes to P&L forecasts in Exhibit 1 below. Following the pre-close trading update, our sales forecasts move up by c 7%, in line with the new guidance for FY17. We leave our growth rates unchanged for forecast years, and hence the higher base causes the uplift in sales in the subsequent years. We have made some changes to our net debt assumptions given the greater clarity regarding working capital movements, and the timing of spend on the capital projects. We illustrate these in Exhibit 2 and these affect our PBT and EPS forecasts through higher interest charges.
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 |
18.6 |
3.4% |
12,560 |
12,993 |
3.4% |
102,126 |
108,729 |
6.5% |
|
2018e |
19.5 |
19.3 |
-1.3% |
13,660 |
13,479 |
-1.3% |
109,275 |
116,340 |
6.5% |
|
2019e |
20.7 |
19.2 |
-7.1% |
14,456 |
13,429 |
-7.1% |
114,739 |
122,157 |
6.5% |
|
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 2: Old vs new net debt forecasts, £000s
Old |
New |
% change |
|
2017e |
5,590 |
11,000 |
96.8% |
2018e |
16,699 |
26,984 |
61.6% |
2019e |
12,187 |
38,642 |
217.1% |
Source: Edison Investment Research
Valuation update
We illustrate Treatt’s valuation versus its ingredients peer group in Exhibit 3 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 3: Benchmark valuation
P/E (x) |
EV/EBITDA (x) |
Dividend yield (%) |
||||||
Market cap (m) |
2017 |
2018 |
2017 |
2018 |
2017 |
2018 |
||
Givaudan |
CHF19,344 |
26.8 |
25.1 |
18.5 |
17.2 |
2.8% |
3.0% |
|
IFF |
$11,286 |
24.8 |
22.9 |
16.5 |
15.2 |
1.9% |
2.1% |
|
Symrise |
CHF9,476 |
28.4 |
25.7 |
15.3 |
14.1 |
1.4% |
1.6% |
|
Frutarom |
ILS16,346 |
29.7 |
25.4 |
19.8 |
17.3 |
0.4% |
0.5% |
|
Chr Hansen |
DKK71,134 |
43.2 |
38.8 |
27.9 |
25.1 |
1.8% |
1.6% |
|
Kerry |
€14,411 |
24.1 |
22.2 |
17.2 |
15.6 |
0.8% |
0.8% |
|
Ingredion |
$8,653 |
15.9 |
14.7 |
9.1 |
8.4 |
1.7% |
1.8% |
|
Peer group average |
27.6 |
25.0 |
17.8 |
16.1 |
1.5% |
1.6% |
||
Treatt |
£250.0 |
23.4 |
22.7 |
15.6 |
12.5 |
1.3% |
1.3% |
|
Premium/(discount) to peer group (%) |
-15.2% |
-8.8% |
-11.9% |
-22.3% |
-16.2% |
-18.8% |
||
Source: Bloomberg (prices as of 2 October 2017). Note: Treatt figures are calendarised to aid comparison.
Our DCF-derived fair value is now 522p (previously 438p) following the changes to our model detailed in our forecast review section above. We have also rolled our DCF model forward to commence in 2018. Our longer-term sales growth forecast remains at 3.5% 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%.
Sensitivities
Despite 60% of turnover being exposed to the ‘defensive’ beverage sector, Treatt has a couple of key sensitivities, which it seeks to mitigate through the in-depth knowledge and skill base of its buying team and undertaking an active hedging policy where possible:
■
Commodity exposure: namely citrus oils, which make up c 30% of revenues.
■
Foreign exchange: translation risk on US dollar profits, which it manages through hedging.
Exhibit 4: Financial summary
£000s |
2014 |
2015 |
2016 |
2017e |
2018e |
2019e |
||
Year end September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
79,189 |
85,934 |
88,040 |
108,729 |
116,340 |
122,157 |
Cost of Sales |
(61,218) |
(66,955) |
(67,639) |
(82,012) |
(87,171) |
(91,285) |
||
Gross Profit |
17,971 |
18,979 |
20,401 |
26,717 |
29,169 |
30,872 |
||
EBITDA |
|
|
9,068 |
10,307 |
11,604 |
16,392 |
20,597 |
24,016 |
Operating Profit (before amort., except and sbp.) |
|
|
7,846 |
9,063 |
10,257 |
14,580 |
16,258 |
17,380 |
Intangible Amortisation |
(172) |
(175) |
(142) |
(160) |
(160) |
(160) |
||
Share based payments |
(46) |
(198) |
(566) |
(887) |
(920) |
(917) |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
7,628 |
8,690 |
9,549 |
13,533 |
15,178 |
16,303 |
||
Net Interest |
(724) |
(740) |
(703) |
(540) |
(1,699) |
(2,874) |
||
Exceptionals |
(1,402) |
(174) |
(553) |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
7,122 |
8,323 |
9,554 |
14,040 |
14,559 |
14,506 |
Profit Before Tax (FRS 3) |
|
|
5,502 |
7,776 |
8,293 |
12,993 |
13,479 |
13,429 |
Profit Before Tax (company) |
|
|
6,904 |
7,950 |
8,846 |
12,993 |
13,479 |
13,429 |
Tax |
(1,553) |
(1,786) |
(2,144) |
(3,313) |
(3,437) |
(3,424) |
||
Profit After Tax (norm) |
5,326 |
6,537 |
7,410 |
10,727 |
11,122 |
11,082 |
||
Profit After Tax (FRS 3) |
3,949 |
5,990 |
6,149 |
9,680 |
10,042 |
10,005 |
||
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 |
20.6 |
21.3 |
21.3 |
EPS - normalised & fully diluted (p) |
|
|
10.3 |
12.6 |
14.1 |
20.1 |
20.8 |
20.7 |
EPS - (IFRS) (p) |
|
|
7.7 |
11.6 |
11.8 |
18.6 |
19.3 |
19.2 |
Dividend per share (p) |
3.8 |
4.0 |
4.4 |
6.2 |
6.4 |
6.4 |
||
Gross Margin (%) |
22.7 |
22.1 |
23.2 |
24.6 |
25.1 |
25.3 |
||
EBITDA Margin (%) |
11.5 |
12.0 |
13.2 |
15.1 |
17.7 |
19.7 |
||
Operating Margin (before GW and except.) (%) |
9.9 |
10.5 |
11.7 |
13.4 |
14.0 |
14.2 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
13,777 |
13,381 |
16,161 |
19,820 |
41,066 |
58,102 |
Intangible Assets |
1,801 |
1,736 |
3,364 |
3,204 |
3,044 |
2,884 |
||
Tangible Assets |
10,994 |
10,998 |
11,361 |
15,180 |
36,586 |
53,782 |
||
Investments |
982 |
647 |
1,436 |
1,436 |
1,436 |
1,436 |
||
Current Assets |
|
|
43,590 |
45,045 |
54,435 |
65,892 |
69,423 |
72,380 |
Stocks |
28,020 |
25,799 |
29,990 |
43,344 |
45,564 |
47,598 |
||
Debtors |
14,509 |
17,635 |
17,853 |
22,048 |
23,359 |
24,283 |
||
Cash |
629 |
1,477 |
6,588 |
500 |
500 |
500 |
||
Other |
432 |
134 |
4 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(16,005) |
(13,481) |
(16,388) |
(25,571) |
(37,481) |
(46,211) |
Creditors |
(12,729) |
(12,675) |
(15,834) |
(17,905) |
(19,158) |
(20,116) |
||
Short term borrowings |
(2,356) |
(567) |
(487) |
(7,666) |
(18,323) |
(26,095) |
||
Provisions |
(920) |
(239) |
(67) |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(12,602) |
(11,760) |
(17,021) |
(13,145) |
(18,273) |
(21,959) |
Long term borrowings |
(7,857) |
(7,065) |
(7,755) |
(3,833) |
(9,161) |
(13,047) |
||
Other long term liabilities |
(4,745) |
(4,695) |
(9,266) |
(9,312) |
(9,112) |
(8,912) |
||
Net Assets |
|
|
28,760 |
33,185 |
37,187 |
46,996 |
54,734 |
62,312 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
3,528 |
8,667 |
10,804 |
2,396 |
18,120 |
21,817 |
Net Interest |
(724) |
(740) |
(703) |
(540) |
(1,699) |
(2,874) |
||
Tax |
(1,552) |
(1,469) |
(2,022) |
(3,313) |
(3,437) |
(3,424) |
||
Capex |
(538) |
(924) |
(679) |
(5,631) |
(25,745) |
(23,832) |
||
Acquisitions/disposals |
(208) |
(103) |
(861) |
0 |
0 |
0 |
||
Financing |
105 |
147 |
280 |
0 |
0 |
0 |
||
Dividends |
(1,899) |
(1,978) |
(2,095) |
(2,257) |
(3,223) |
(3,344) |
||
Net Cash Flow |
(1,288) |
3,600 |
4,724 |
(9,345) |
(15,985) |
(11,658) |
||
Opening net debt/(cash) |
|
|
8,294 |
9,584 |
6,155 |
1,654 |
11,000 |
26,984 |
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 |
11,000 |
26,984 |
38,642 |
Source: Edison Investment Research, Treatt accounts
|
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