Treatt — A strong start to the year

Treatt (LSE: TET)

Last close As at 19/04/2024

420.00

2.00 (0.48%)

Market capitalisation

257m

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Research: Consumer

Treatt — A strong start to the year

Treatt’s H123 results demonstrate that the business is back to greater stability and resilience. The growth was particularly impressive in Citrus, Coffee and China, and management is quietly confident about the rest of the year. We continue to believe that risk lies to the upside in terms of market expectations. Growth in H1 was driven by price increases, which offset inflationary pressures and supported margins. Cost control and efficiency measures are ongoing, and cash flow was strong, as highlighted in the recent trading update, with improved net debt despite the traditional build of working capital at H1.

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Consumer

Treatt

A strong start to the year

H123 results

Food and beverages

10 May 2023

Price

650p

Market cap

£396m

Net debt (£m) at 31 March 2023

17.7

Shares in issue

60.9m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.2

2.4

(35.3)

Rel (local)

9.5

4.9

(39.0)

52-week high/low

904p

507p

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 particular emphasis on the beverage sector.

Next events

Trading update

October 2023

FY23 results

28 November 2023

Analysts

Sara Welford

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Milo Bussell

+44 (0)20 3077 5700

Treatt is a research client of Edison Investment Research Limited

Treatt’s H123 results demonstrate that the business is back to greater stability and resilience. The growth was particularly impressive in Citrus, Coffee and China, and management is quietly confident about the rest of the year. We continue to believe that risk lies to the upside in terms of market expectations. Growth in H1 was driven by price increases, which offset inflationary pressures and supported margins. Cost control and efficiency measures are ongoing, and cash flow was strong, as highlighted in the recent trading update, with improved net debt despite the traditional build of working capital at H1.

Year
end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/21

124.3

22.7

30.1

7.5

21.6

1.2

09/22

140.2

16.5

21.9

7.9

29.7

1.2

09/23e

154.2

18.0

23.6

8.5

27.5

1.3

09/24e

163.5

20.4

26.4

9.6

24.6

1.5

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

Strong sales growth and cash management

H123 sales of £76.0m were 14.6% ahead of the prior year, or +8.5% at constant currency. Gross margin was up 70bps on H122 though, as highlighted at the trading update, higher administrative expenses (increased depreciation and inflationary pressures) led to operating margins 20bps ahead of the comparative period, and adjusted EPS was up 10% to 9.04p. Dividend per share was 2.55p, up 2% as management moves towards a longer-term target of three times dividend cover. Net debt was £17.7m, an improvement versus £22.4m at end FY22.

Value-added products drive growth

Management remains focused on its higher margin, value-added categories and sees particular opportunities in the Coffee segment and in its business in China. The Chinese beverage market is disproportionately citrus-focused, which naturally plays to Treatt’s strengths. Coffee remains an exciting new category for Treatt, with the business well-positioned to capitalise on current consumer interest in the coldbrew category in the US and the UK.

Valuation: Forecasts unchanged

The current share price is discounting medium-term sales growth of 4.8%, falling to 2.0% in perpetuity, with a WACC of 7.7% and a terminal EBIT margin of 21.5% (vs 11.3% in FY22). Our forecasts remain unchanged. We note that H2 is the bigger half year for Treatt as it is a more summer-weighted business, owing to its exposure to beverages in the northern hemisphere. Treatt trades at 28.2x FY23e P/E and 17.4x FY23e EV/EBITDA. On both P/E and EV/EBITDA multiples, it trades at a c 5-10% premium to its peer group. On both metrics it trades at a c 5-10% discount to peers if we exclude those that are more exposed to lower-margin commoditised products.

Valuation

We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 1 below. Treatt trades at a c 5-10% premium to its peer group on both a P/E basis and an EV/EBITDA basis, though we note Kerry and Ingredion have a larger proportion of lower-margin products in their portfolios. If we exclude Kerry and Ingredion, Treatt is trading at a c 5-10% discount to the remaining peers on both P/E and EV/EBITDA multiples. Although it is smaller than its peers, its portfolio of products is increasingly specialised.

Exhibit 1: Comparative valuation

Market cap
(m)

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

2023e

2024e

2023e

2024e

2023e

2024e

Givaudan

CHF 29,101

31.6

28.1

22.0

20.2

2.2

2.3

IFF

$24,777

20.0

17.1

15.1

13.5

3.1

3.2

Symrise

CHF 15,344

32.9

28.6

17.9

16.3

1.1

1.1

Chr Hansen

DKK 68,699

36.4

32.4

21.7

19.8

1.8

2.0

Kerry

€17,037

21.6

19.3

15.8

14.4

1.2

1.3

Ingredion

$7,151

11.9

11.3

8.0

7.7

2.7

2.8

Peer group average

25.7

22.8

16.7

15.3

2.0

2.1

Treatt

£400

28.2

25.2

17.4

16.3

1.3

1.4

Premium/(discount) to peer group (%)

9.5%

10.4%

4.0%

6.4%

(35.7%)

(32.6%)

Source: Refinitiv, Edison Investment Research. Note: Prices as of 8 May 2023.

Exhibit 2: Financial summary

£000's

2020

2021

2022

2023e

2024e

2025e

Year end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

109,016

124,326

140,185

154,204

163,456

171,628

Cost of Sales

(77,140)

(82,103)

(101,101)

(110,286)

(115,759)

(120,345)

Gross Profit

31,876

42,223

39,084

43,918

47,697

51,283

EBITDA

 

 

17,862

24,877

19,503

24,255

25,917

27,553

Operating profit (before amort. and excepts.)

 

 

16,053

23,172

17,027

19,010

20,830

22,221

Intangible Amortisation

(75)

(93)

(215)

(183)

(155)

(132)

Share based payments

(886)

(1,733)

(1,039)

(1,014)

(1,140)

(1,233)

Other

0

0

0

0

0

0

Operating Profit

15,092

21,346

15,773

17,813

19,536

20,856

Net Interest

(291)

(427)

(517)

(1,038)

(446)

(199)

Exceptionals

(1,060)

(1,302)

923

0

0

0

Profit Before Tax (norm)

 

 

15,762

22,745

16,510

17,972

20,384

22,022

Profit Before Tax (FRS 3)

 

 

13,741

19,617

16,179

16,775

19,089

20,657

Profit Before Tax (company)

 

 

14,801

20,919

15,256

16,775

19,089

20,657

Tax

(2,896)

(4,469)

(2,864)

(3,774)

(4,486)

(4,854)

Profit After Tax (norm)

12,762

18,090

13,215

14,198

15,898

17,168

Profit After Tax (FRS 3)

10,845

15,148

13,315

13,001

14,603

15,802

Discontinued operations

0

0

0

0

0

0

Average Number of Shares Outstanding (m)

59.8

60.1

60.3

60.3

60.3

60.3

EPS - normalised (p)

 

 

21.3

30.1

21.9

23.6

26.4

28.5

EPS - adjusted (p)

 

 

19.7

27.1

25.4

21.6

24.2

26.2

EPS - (IFRS) (p)

 

 

18.1

25.2

22.1

21.6

24.2

26.2

Dividend per share (p)

6.0

7.5

7.9

8.5

9.6

10.4

Gross Margin (%)

29.2

34.0

27.9

28.5

29.2

29.9

EBITDA Margin (%)

16.4

20.0

13.9

15.7

15.9

16.1

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

14.7

18.6

12.1

12.3

12.7

12.9

Operating Margin (%)

13.8

17.2

11.3

11.6

12.0

12.2

BALANCE SHEET

Fixed Assets

 

 

54,048

65,811

79,644

81,143

82,353

83,822

Intangible Assets

1,358

2,424

3,206

3,023

2,868

2,736

Tangible Assets

50,159

61,039

74,281

78,120

79,485

81,086

Investments

2,531

2,348

2,157

0

0

0

Current Assets

 

 

69,472

83,606

108,537

99,965

104,841

109,107

Stocks

36,050

47,263

68,351

63,686

67,017

70,024

Debtors

24,167

26,371

37,113

33,925

35,470

36,728

Cash

7,739

7,260

2,354

2,354

2,354

2,354

Other

1,516

2,712

719

0

0

0

Current Liabilities

 

 

(15,989)

(30,460)

(46,224)

(30,508)

(27,775)

(24,313)

Creditors

(12,640)

(17,620)

(23,792)

(20,164)

(20,994)

(21,656)

Short term borrowings

(3,203)

(12,697)

(22,035)

(9,947)

(6,384)

(2,260)

Provisions

(146)

(143)

(397)

(397)

(397)

(397)

Long Term Liabilities

 

 

(16,411)

(11,605)

(7,711)

(11,342)

(9,561)

(7,499)

Long term borrowings

(3,450)

(2,624)

(2,342)

(4,973)

(3,192)

(1,130)

Other long-term liabilities

(12,961)

(8,981)

(5,369)

(6,369)

(6,369)

(6,369)

Net Assets

 

 

91,120

107,352

134,246

139,258

149,858

161,117

CASH FLOW

Operating Cash Flow

 

 

15,677

13,442

(1,830)

28,481

21,871

23,948

Net Interest

(191)

(270)

(382)

(1,038)

(446)

(199)

Tax

(2,191)

(4,874)

443

(3,774)

(4,486)

(4,854)

Capex

(23,909)

(13,195)

(11,849)

(9,084)

(6,452)

(6,933)

Acquisitions/disposals

(1,041)

(1,178)

4,672

0

0

0

Financing

(69)

238

475

0

0

0

Dividends

(3,378)

(3,704)

(4,834)

(4,731)

(5,143)

(5,777)

Net Cash Flow

(15,102)

(9,541)

(13,305)

9,853

5,344

6,186

Opening net debt/(cash)

 

 

(15,958)

(427)

9,114

22,419

12,566

7,222

HP finance leases initiated

0

0

0

0

0

0

Other

(429)

(0)

0

0

0

0

Closing net debt/(cash)

 

 

(427)

9,114

22,419

12,566

7,222

1,036

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 £60,000 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 2023 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

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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 £60,000 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 2023 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

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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