Treatt — A strong and resilient performance

Treatt (LSE: TET)

Last close As at 20/04/2024

420.00

2.00 (0.48%)

Market capitalisation

257m

More on this equity

Research: Consumer

Treatt — A strong and resilient performance

Treatt has performed well during FY20 despite the pandemic. There was strong momentum across the tea, health & wellness, and fruit & vegetables categories, and citrus markets recovered as expected. The strong growth across the non-citrus segments is resulting in a slightly reduced dependence on citrus (now 50% of sales). The UK relocation was slowed down as a result of the first lockdown, but the building work is now complete and the move will begin in mid-2021. While management report a strong start to the new financial year, the outlook is understandably uncertain: demand is not expected to return to normal levels before the end of FY21 or into FY22, though management is confident the business is in the best possible shape to face the uncertainty. The FY20 results demonstrate this, with a good cash performance and a 9% increase in dividends implying management’s confidence in the year ahead.

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Consumer

Treatt

A strong and resilient performance

FY20 results

Food & beverages

24 November 2020

Price

652.00p

Market cap

£389m

Net cash (£m) at 30 September 2020

0.4

Shares in issue

59.4m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.7

10.6

57.6

Rel (local)

(0.5)

3.5

78.0

52-week high/low

652.0p

310.0p

Business description

Treatt provides innovative ingredient solutions from its manufacturing bases in Europe, North America and Africa, principally for the flavours and fragrance industries and multinational consumer goods companies, with particular emphasis on the beverage sector.

Next events

AGM

January 2021

Trading statement

March 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 performed well during FY20 despite the pandemic. There was strong momentum across the tea, health & wellness, and fruit & vegetables categories, and citrus markets recovered as expected. The strong growth across the non-citrus segments is resulting in a slightly reduced dependence on citrus (now 50% of sales). The UK relocation was slowed down as a result of the first lockdown, but the building work is now complete and the move will begin in mid-2021. While management report a strong start to the new financial year, the outlook is understandably uncertain: demand is not expected to return to normal levels before the end of FY21 or into FY22, though management is confident the business is in the best possible shape to face the uncertainty. The FY20 results demonstrate this, with a good cash performance and a 9% increase in dividends implying management’s confidence in the year ahead.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/19

112.7

14.0

19.0

5.5

30.5

0.9

09/20

109.0

15.8

21.3

6.0

27.5

1.0

09/21e

114.5

16.2

22.0

6.2

26.6

1.1

09/22e

119.0

17.2

23.3

6.5

25.1

1.1

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

Natural extracts remain attractive

The flavours and fragrances market continues to be an attractive space, and in particular the natural extracts segment. Treatt has successfully repositioned its portfolio to capitalise on consumer trends for products that are better for both consumers and the planet. For example, the consumer shift away from categories such as beer and towards products such as craft beers, alcoholic seltzers and cocktails – which all contain natural flavourings – serves as a material driver of growth for the whole flavour industry, and for Treatt in particular.

Impressive margin improvement

The fall in citrus oil pricing resulted in a reduction in revenue, but at the profit level this was offset by an improvement in mix, with growth in the more value-added parts of the business (both within citrus and in other segments) outpacing the growth in more commoditised areas. This resulted in a material improvement in group gross margin (380bp) to 29.2%, and EBITDA margin (220bp). Overall, performance was ahead of management’s own expectations at the start of the year.

Valuation: Fair value of 670p

We value Treatt using a DCF model, which indicates a fair value of 670p (unchanged). Our profit forecasts increase slightly, and a lower tax rate results in our earnings estimates increasing. Cash flow was better than expected in FY20, but some capex has been delayed into FY21 and hence our overall DCF value remains unchanged. Treatt trades at 26.6x FY21e P/E and 17.9x FY21e EV/EBITDA. On P/E it trades at a c 15% discount to its peer group, while on EV/EBITDA it is broadly in line.

FY20 results

Treatt’s FY20 revenues of £109.0m were broadly in line with our expectations and with the recent trading update. Company-adjusted PBT was £14.8m, ahead of our £14.0m forecast. Adjusted EPS (as defined by Treatt) were up 10.7% to 19.7p, and well ahead of our 17.6p forecast. Cash flow was also strong and the year-end FY20 position is net cash of £0.4m (or £1.1m excluding IFRS 16 lease liabilities).

Treatt performed well across all its segments during FY20, and the company continues to focus on market opportunities in coffee, natural extracts and the relatively new hard seltzer market. As discussed above, the citrus segment witnessed a 9.8% fall in revenues, but gross profits were not lower in absolute terms, which is testament to the company’s transformation over the last few years towards value-added ingredients solutions rather than the more commoditised traded citrus products. Tea was up c 3% despite the on-trade segment being severely affected by the pandemic, and the hospitality segment making up a large part of the end market for Treatt’s tea business. A large supermarket customer witnessed positive growth in tea throughout the pandemic, and helped Treatt to offset some of the sales reduction from the hospitality business. The Health & Wellness segment was up 16% in revenue terms, while the Fruit & Vegetables and the Herbs, Spices & Florals segments were up 10% and 8% respectively. The legacy Aroma & HICs business was down 2.4% as Treatt continues to shift its focus away from traded commodities and towards value-added solutions.

Exhibit 1: Actual vs forecast key P&L metrics

2020

Forecast

Estimate

Actual

Diff

Revenue (£000s)

109,335

109,016

-0.3%

Operating profit (£000s)*

14,187

15,092

6.4%

PBT (pre exceptional) Treatt (£000s)*

13,987

14,801

5.8%

PBT (pre exceptional) Edison (£000s)

14,736

15,762

7.0%

Basic EPS (pre exceptional) Treatt (p)*

17.6

18.1

2.9%

Basic EPS (pre exceptional) Edison (p)

18.9

21.3

12.9%

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

As previously flagged, the UK relocation has been delayed by the pandemic, though building work is now complete and the move will begin in mid-2021.

We have updated our forecasts in light of the FY20 results and illustrate the key changes in Exhibit 2 below. We also introduce FY23 forecasts (see Exhibit 4).

Exhibit 2: Old vs new key P&L forecasts

2021e

2022e

Forecast

Old

New

Diff

Old

New

Diff

Revenue (£000s)

114,802

114,467

-0.3%

119,394

119,045

-0.3%

Operating profit (£000s)*

14,931

15,160

1.5%

15,767

16,004

1.5%

PBT (pre exceptional) Treatt (£000s)*

15,020

15,166

1.0%

15,912

16,053

0.9%

PBT (pre exceptional) Edison (£000s)

15,807

16,221

2.6%

16,732

17,156

2.5%

Basic EPS (pre exceptional) Treatt (p)*

18.9

20.3

7.2%

20.0

21.5

7.1%

Basic EPS (pre exceptional) Edison (p)

20.3

22.0

8.8%

21.4

23.3

8.7%

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


Valuation

We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 3 below. For 2021, Treatt trades at a c 15% discount to its peer group on P/E, and broadly in line on an EV/EBITDA basis. Although it is smaller than its peers, its portfolio of products is increasingly specialised and the company has demonstrated its resilience with a robust performance despite the COVID-19 pandemic.

Exhibit 3: Comparative valuation

Market cap (m)

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

2020e

2021e

2020e

2021e

2020e

2021e

Givaudan

CHF33,666

39.3

36.6

26.9

25.5

1.8

1.8

IFF

$11,971

20.0

18.2

15.4

14.0

2.7

2.8

Symrise

CHF14,222

40.0

37.0

20.6

19.5

1.0

1.1

Chr Hansen

DKK6,264

44.1

47.1

30.2

30.0

1.3

1.6

Kerry

€85,252

34.8

30.3

23.4

21.1

0.7

0.8

Ingredion

$2,969

12.8

12.0

8.0

7.6

3.4

3.5

Peer group average

32.2

31.9

21.2

20.8

1.8

1.8

Treatt

£350.7

27.5

26.6

20.1

17.9

1.0

1.1

Premium/(discount) to peer group (%)

(5.3%)

(14.5%)

5.9%

(3.4%)

(48.9%)

(43.2%)

Source: Refinitiv, Edison Investment Research. Note: Prices as of 20 November 2020.

Our DCF-derived fair value remains unchanged at 670p. Cash flow was better than expected in FY20, but some capex has been delayed into FY21 and hence our overall DCF value remains unchanged. Our assumptions are also unchanged: longer-term sales growth of 5.0% pa, falling to 2% growth in perpetuity; a WACC of 6.0% (predicated on a beta of 0.8, a risk-free rate of 2.0%, an equity risk premium of 5.0% and a borrowing spread of 5.0%).

Exhibit 4: Financial summary

£000's

2017

2018

2019

2020

2021e

2022e

2023e

Year end 30 September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

101,250

112,163

112,717

109,016

114,467

119,045

123,807

Cost of Sales

(75,985)

(84,407)

(84,060)

(77,140)

(81,226)

(84,237)

(87,359)

Gross Profit

25,265

27,756

28,657

31,876

33,241

34,809

36,449

EBITDA

 

 

15,049

16,627

15,785

17,862

19,978

23,424

24,446

Operating Profit (before amort., except and sbp)

 

 

13,650

15,108

14,226

16,053

16,215

17,108

18,050

Intangible Amortisation

(137)

(124)

(90)

(75)

(64)

(54)

(46)

Share based payments

(966)

(1,040)

(637)

(886)

(991)

(1,049)

(1,111)

Other

0

0

0

0

0

0

0

Operating Profit

12,547

13,944

13,499

15,092

15,160

16,004

16,892

Net Interest

(851)

(1,302)

(199)

(291)

6

49

114

Exceptionals

0

(1,105)

(755)

(1,060)

0

0

0

Profit Before Tax (norm)

 

 

12,799

13,806

14,027

15,762

16,221

17,156

18,163

Profit Before Tax (FRS 3)

 

 

11,696

11,537

12,545

13,741

15,166

16,053

17,006

Profit Before Tax (company)

 

 

11,696

12,642

13,300

14,801

15,166

16,053

17,006

Tax

(3,129)

(2,284)

(2,673)

(2,896)

(3,033)

(3,211)

(3,401)

Profit After Tax (norm)

9,670

11,392

11,263

12,762

13,188

13,946

14,762

Profit After Tax (FRS 3)

8,567

9,253

9,872

10,845

12,133

12,842

13,605

Discontinued operations

978

2,976

(1,084)

0

0

0

0

Average Number of Shares Outstanding (m)

52.2

56.8

59.1

59.8

59.8

59.8

59.8

EPS - normalised (p)

 

 

18.5

20.1

19.0

21.3

22.0

23.3

24.7

EPS - adjusted (p)

 

 

18.3

18.0

17.8

19.7

20.3

21.5

22.7

EPS - (IFRS) (p)

 

 

16.4

16.3

16.7

18.1

20.3

21.5

22.7

Dividend per share (p)

4.8

5.1

5.5

6.0

6.2

6.5

6.9

Gross Margin (%)

25.0

24.7

25.4

29.2

29.0

29.2

29.4

EBITDA Margin (%)

14.9

14.8

14.0

16.4

17.5

19.7

19.7

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

13.5

13.5

12.6

14.7

14.2

14.4

14.6

BALANCE SHEET

Fixed Assets

 

 

19,532

21,863

31,730

54,048

62,265

56,179

51,594

Intangible Assets

3,331

752

845

1,358

1,294

1,240

1,194

Tangible Assets

14,821

20,038

29,485

50,159

59,612

53,581

49,042

Investments

1,380

1,073

1,400

2,531

1,358

1,358

1,358

Current Assets

 

 

68,230

102,401

98,158

69,472

70,509

72,663

74,888

Stocks

42,878

39,642

36,799

36,050

37,624

38,890

40,198

Debtors

19,973

28,828

23,020

24,167

25,146

26,033

26,951

Cash

4,748

32,304

37,187

7,739

7,739

7,739

7,739

Other

631

1,627

1,152

1,516

0

0

0

Current Liabilities

 

 

(27,003)

(35,781)

(28,905)

(15,989)

(18,929)

(9,604)

(911)

Creditors

(19,266)

(16,479)

(11,784)

(12,640)

(12,062)

(11,949)

(11,808)

Short term borrowings

(7,680)

(19,244)

(16,860)

(3,203)

(6,867)

2,346

10,897

Provisions

(57)

(58)

(261)

(146)

0

0

0

Long Term Liabilities

 

 

(14,281)

(6,858)

(13,876)

(16,411)

(17,195)

(12,388)

(7,913)

Long term borrowings

(7,293)

(3,001)

(4,369)

(3,450)

(3,434)

1,173

5,448

Other long term liabilities

(6,988)

(3,857)

(9,507)

(12,961)

(13,761)

(13,561)

(13,361)

Net Assets

 

 

46,478

81,625

87,107

91,120

96,650

106,850

117,659

CASH FLOW

Operating Cash Flow

 

 

4,683

3,580

20,544

15,677

16,846

20,958

21,879

Net Interest

(913)

(609)

(199)

(191)

6

49

114

Tax

(2,822)

(2,978)

(2,208)

(2,191)

(3,033)

(3,211)

(3,401)

Capex

(5,111)

(6,190)

(10,392)

(23,909)

(13,217)

(286)

(1,857)

Acquisitions/disposals

(1,667)

8,357

855

(1,041)

0

0

0

Financing

270

21,090

622

(69)

0

0

0

Dividends

(3,025)

(2,876)

(3,080)

(3,378)

(3,590)

(3,691)

(3,907)

Net Cash Flow

(8,585)

20,374

6,142

(15,102)

(2,988)

13,819

12,827

Opening net debt/(cash)

 

 

1,654

10,225

(10,059)

(15,958)

(427)

2,562

(11,257)

HP finance leases initiated

0

0

0

0

0

0

0

Other

14

(90)

(243)

(429)

(0)

0

(0)

Closing net debt/(cash)

 

 

10,225

(10,059)

(15,958)

(427)

2,562

(11,257)

(24,084)

Source: Edison Investment Research, company data


General disclaimer and copyright

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

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

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General disclaimer and copyright

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

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

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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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

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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