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Market capitalisation
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Research: Consumer
Treatt has had another successful year: notwithstanding the decline in citrus prices, revenues were up 0.5%, or down 2% at constant currency. This demonstrates the transformation that has occurred at the company over the last few years, from a commodity trading house to a provider of value-added, technical flavour and fragrance solutions. While orange oil prices were down 50% and revenue from the citrus category was down 10%, Treatt’s broadened portfolio was able to withstand the decline by registering significant growth elsewhere, notably in tea, health & wellness and fruit & vegetables. Management’s outlook for FY20 is positive, despite citrus pricing continuing to have an adverse effect.
Written by
Treatt |
Another good year despite citrus price deflation |
FY19 trading update |
Food & beverages |
7 October 2019 |
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 another successful year: notwithstanding the decline in citrus prices, revenues were up 0.5%, or down 2% at constant currency. This demonstrates the transformation that has occurred at the company over the last few years, from a commodity trading house to a provider of value-added, technical flavour and fragrance solutions. While orange oil prices were down 50% and revenue from the citrus category was down 10%, Treatt’s broadened portfolio was able to withstand the decline by registering significant growth elsewhere, notably in tea, health & wellness and fruit & vegetables. Management’s outlook for FY20 is positive, despite citrus pricing continuing to have an adverse effect.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/17 |
101.3 |
12.8 |
18.5 |
4.8 |
21.8 |
1.2 |
09/18 |
112.2 |
13.8 |
20.3 |
5.1 |
19.9 |
1.3 |
09/19e |
112.7 |
14.4 |
18.7 |
5.1 |
21.6 |
1.3 |
09/20e |
115.0 |
15.3 |
19.9 |
5.9 |
20.4 |
1.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Balanced portfolio is robust
Treatt’s portfolio is well-suited for the current consumer trends of clean labels and more natural, better-for-you products, without compromising on taste. The fact that the organic (constant currency) revenue decrease was only 2%, despite pressure on citrus pricing due to raw materials weakness, demonstrates the strength of the portfolio. The citrus category represented 54% of group revenue and was down 10% in revenue terms, but this was offset by substantial growth in the remaining categories. The non-citrus categories continue to display significant growth potential, and the news in the latest trading statement is that cold brew coffee will be a new market opportunity for Treatt from FY20.
Expansion a key step for the future
FY19 witnessed the completion of the US expansion, which occurred on budget and on schedule. The capacity in non-citrus was doubled, and the size of the technical and innovation centre was quadrupled. The UK relocation continues, with construction beginning last month, and occupancy scheduled for fiscal Q420.
Valuation: Remains attractive
We value Treatt using a DCF model, which indicates a fair value of 530p (previously 517p). The increase is due to slightly higher profit forecasts and a reduction in our net debt forecasts. Treatt trades at 20.4x FY20e P/E and 14.1x FY20e EV/EBITDA. On both P/E and EV/EBITDA multiples it trades at a c 15% discount to its peer group.
Forecasts
We trim our FY19 sales forecasts slightly in light of the FY19 trading statement, and to reflect lower citrus prices. Our operating profit and PBT forecasts nudge up slightly as the favourable mix would have improved margins. Our net debt forecasts are also updated to reflect the fall in inventories and in receivables due to the depressed citrus prices.
Exhibit 1: Old vs new key P&L forecasts
EPS* (p) |
PBT* (£000s) |
Revenue (£000s) |
|||||||
Old |
New |
% change |
Old |
New |
% change |
Old |
New |
% change |
|
2019e |
15.1 |
15.3 |
1.6% |
13,064 |
13,250 |
1.4% |
113,845 |
112,724 |
-1.0% |
2020e |
17.2 |
17.6 |
2.7% |
13,614 |
13,979 |
2.7% |
116,122 |
114,978 |
-1.0% |
2021e |
18.3 |
18.9 |
3.5% |
14,477 |
14,990 |
3.5% |
120,767 |
119,577 |
-1.0% |
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 cash/(debt) forecasts
£000s |
Old |
New |
% chg |
2019e |
(3,000) |
15,904 |
N/A |
2020e |
(7,204) |
10,812 |
N/A |
2021e |
4,274 |
23,513 |
450.2% |
Source: Edison Investment Research
Valuation
We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 3 below. Treatt trades at a discount to its peer group on both a P/E and EV/EBITDA basis. We believe some discount is justified 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.
Exhibit 3: Comparative valuation
Market cap (m) |
P/E (x) |
EV/EBITDA (x) |
Dividend yield (%) |
|||||
2019e |
2020e |
2019e |
2020e |
2019e |
2020e |
|||
Givaudan |
CHF 24,963 |
31.4 |
28.2 |
22.1 |
20.1 |
2.3 |
2.4 |
|
IFF |
$12,591 |
19.1 |
17.9 |
15.1 |
14.2 |
2.5 |
2.6 |
|
Symrise |
CHF 11,422 |
34.7 |
29.7 |
17.7 |
15.7 |
1.2 |
1.3 |
|
Chr Hansen |
DKK 76,107 |
40.1 |
36.2 |
26.6 |
24.3 |
2.0 |
1.9 |
|
Kerry |
€ 18,611 |
27.1 |
24.7 |
19.5 |
17.9 |
0.7 |
0.8 |
|
Ingredion |
$5,218 |
11.8 |
11.0 |
7.4 |
7.1 |
3.1 |
3.2 |
|
Peer group average |
27.3 |
24.6 |
18.1 |
16.5 |
2.0 |
2.0 |
||
Treatt |
238.6 |
21.6 |
20.4 |
15.0 |
14.1 |
1.3 |
1.5 |
|
Premium/(discount) to peer group (%) |
(20.9%) |
(17.3%) |
(17.0%) |
(14.6%) |
(35.8%) |
(28.6%) |
||
Source: Refinitiv, Edison Investment Research. Note: Prices as of 4 October 2019
Our DCF-derived fair value increases to 530p (from 517p previously), due to the slight increase in our profit forecasts and our lower net debt (now net cash) forecasts. Our longer-term sales growth forecast remains at 5.0% pa, falling to 2% growth in perpetuity. Our DCF is calculated based on a WACC of 6.8% (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%.
Exhibit 4: Financial summary
£000s |
2016 |
2017 |
2018 |
2019e |
2020e |
2021e |
2022e |
|||
Year end September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|||
PROFIT & LOSS |
||||||||||
Revenue |
|
|
88,040 |
101,250 |
112,163 |
112,724 |
114,978 |
119,577 |
124,361 |
|
Cost of Sales |
(67,639) |
(75,985) |
(84,407) |
(84,829) |
(86,066) |
(89,269) |
(92,591) |
|||
Gross Profit |
20,401 |
25,265 |
27,756 |
27,895 |
28,913 |
30,308 |
31,769 |
|||
EBITDA |
|
|
11,604 |
15,049 |
16,627 |
16,281 |
17,406 |
20,629 |
21,621 |
|
Operating Profit (before amort., except. and share-based payments.) |
10,257 |
13,650 |
10,257 |
13,650 |
15,108 |
14,616 |
15,490 |
|||
Intangible Amortisation |
(142) |
(137) |
(124) |
(105) |
(90) |
(76) |
(65) |
|||
Share based payments |
(566) |
(966) |
(1,040) |
(1,061) |
(1,221) |
(1,310) |
(1,388) |
|||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
|||
Operating Profit |
9,549 |
12,547 |
13,944 |
13,450 |
14,179 |
14,902 |
15,746 |
|||
Net Interest |
(703) |
(851) |
(1,302) |
(200) |
(200) |
88 |
144 |
|||
Exceptionals |
(553) |
0 |
(1,105) |
(825) |
0 |
0 |
0 |
|||
Profit Before Tax (norm) |
|
|
9,554 |
12,799 |
13,806 |
14,416 |
15,290 |
16,376 |
17,344 |
|
Profit Before Tax (FRS 3) |
|
|
8,293 |
11,696 |
11,537 |
12,425 |
13,979 |
14,990 |
15,891 |
|
Profit Before Tax (company) |
|
|
8,846 |
11,696 |
12,642 |
13,250 |
13,979 |
14,990 |
15,891 |
|
Tax |
(2,144) |
(3,129) |
(2,284) |
(3,379) |
(3,565) |
(3,822) |
(4,052) |
|||
Profit After Tax (norm) |
7,410 |
9,670 |
11,522 |
11,038 |
11,725 |
12,553 |
13,292 |
|||
Profit After Tax (FRS 3) |
6,149 |
8,567 |
9,253 |
9,046 |
10,414 |
11,168 |
11,839 |
|||
Discontinued operations |
0 |
978 |
2,976 |
(1,800) |
0 |
0 |
0 |
|||
Average Number of Shares Outstanding (m) |
51.9 |
52.2 |
56.8 |
59.1 |
59.1 |
59.1 |
59.1 |
|||
EPS - normalised (p) |
|
|
14.3 |
18.5 |
20.3 |
18.7 |
19.9 |
21.3 |
22.5 |
|
EPS - normalised & fully diluted (p) |
|
|
14.1 |
17.9 |
19.8 |
18.5 |
19.6 |
21.0 |
22.2 |
|
EPS - (IFRS) (p) |
|
|
11.8 |
16.4 |
21.5 |
15.3 |
17.6 |
18.9 |
20.0 |
|
Dividend per share (p) |
4.4 |
4.8 |
5.1 |
5.1 |
5.9 |
6.3 |
6.7 |
|||
Gross Margin (%) |
23.2 |
25.0 |
24.7 |
24.7 |
25.1 |
25.3 |
25.5 |
|||
EBITDA Margin (%) |
13.2 |
14.9 |
14.8 |
14.4 |
15.1 |
17.3 |
17.4 |
|||
Operating Margin (before GW and except.) (%) |
11.7 |
13.5 |
13.5 |
13.0 |
13.5 |
13.6 |
13.8 |
|||
BALANCE SHEET |
||||||||||
Fixed Assets |
|
|
16,161 |
19,532 |
21,863 |
42,784 |
55,502 |
49,378 |
45,257 |
|
Intangible Assets |
3,364 |
3,331 |
752 |
647 |
557 |
481 |
416 |
|||
Tangible Assets |
11,361 |
14,821 |
20,038 |
41,064 |
53,872 |
47,824 |
43,768 |
|||
Investments |
1,436 |
1,380 |
1,073 |
1,073 |
1,073 |
1,073 |
1,073 |
|||
Current Assets |
|
|
54,435 |
68,230 |
102,401 |
82,953 |
83,061 |
85,331 |
87,825 |
|
Stocks |
29,990 |
42,878 |
39,642 |
25,750 |
26,035 |
27,554 |
29,154 |
|||
Debtors |
17,853 |
19,973 |
28,828 |
24,463 |
24,722 |
25,472 |
26,367 |
|||
Cash |
6,588 |
4,748 |
32,304 |
32,304 |
32,304 |
32,304 |
32,304 |
|||
Other |
4 |
631 |
1,627 |
436 |
0 |
0 |
0 |
|||
Current Liabilities |
|
|
(16,388) |
(27,003) |
(35,781) |
(27,063) |
(30,206) |
(21,775) |
(14,490) |
|
Creditors |
(15,834) |
(19,266) |
(16,479) |
(16,130) |
(15,878) |
(15,915) |
(15,930) |
|||
Short term borrowings |
(487) |
(7,680) |
(19,244) |
(10,934) |
(14,328) |
(5,861) |
1,439 |
|||
Provisions |
(67) |
(57) |
(58) |
0 |
0 |
0 |
0 |
|||
Long Term Liabilities |
|
|
(17,021) |
(14,281) |
(6,858) |
(10,124) |
(11,621) |
(7,187) |
(3,337) |
|
Long term borrowings |
(7,755) |
(7,293) |
(3,001) |
(5,467) |
(7,164) |
(2,930) |
720 |
|||
Other long term liabilities |
(9,266) |
(6,988) |
(3,857) |
(4,657) |
(4,457) |
(4,257) |
(4,057) |
|||
Net Assets |
|
|
37,187 |
46,478 |
81,625 |
88,549 |
96,737 |
105,746 |
115,254 |
|
CASH FLOW |
||||||||||
Operating Cash Flow |
|
|
10,804 |
4,683 |
3,580 |
34,345 |
16,409 |
18,197 |
18,942 |
|
Net Interest |
(703) |
(913) |
(609) |
(200) |
(200) |
88 |
144 |
|||
Tax |
(2,022) |
(2,822) |
(2,978) |
(3,379) |
(3,565) |
(3,822) |
(4,052) |
|||
Capex |
(679) |
(5,111) |
(6,190) |
(23,127) |
(14,725) |
1,706 |
(365) |
|||
Acquisitions/disposals |
(861) |
(1,667) |
8,357 |
1,100 |
0 |
0 |
0 |
|||
Financing |
280 |
270 |
21,090 |
0 |
0 |
0 |
0 |
|||
Dividends |
(2,095) |
(3,025) |
(2,876) |
(2,895) |
(3,012) |
(3,468) |
(3,719) |
|||
Net Cash Flow |
4,724 |
(8,585) |
20,374 |
5,845 |
(5,092) |
12,702 |
10,950 |
|||
Opening net debt/(cash) |
|
|
6,155 |
1,654 |
10,225 |
(10,059) |
(15,904) |
(10,812) |
(23,513) |
|
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
|||
Other |
(223) |
14 |
(90) |
0 |
0 |
0 |
0 |
|||
Closing net debt/(cash) |
|
|
1,654 |
10,225 |
(10,059) |
(15,904) |
(10,812) |
(23,513) |
(34,463) |
|
Source: Company accounts, Edison Investment Research
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Royalty investing is a profitable and significant form of alternative finance in North America. However, it is still a nascent industry in Europe and Duke Royalty was set up in 2015 by an experienced team to change this. Its current portfolio is now close to £80m and it aims to add £45–100m in deals a year in the coming years. Duke has just announced a fund-raising of up to £20m, of which £16.1m has already been placed in an institutional offering at 44p per share. This will allow it to invest another £45m in the next 12 months. We estimate a sustainable ROE of 14% for Duke and we see the current fair value range at 50–58p per share.