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Research: Consumer
The last few years have seen Treatt grow at a spectacular rate, and although – as expected – the growth has moderated, it demonstrates that momentum persists in the business, and management has continued to build on prior growth despite the demanding comparatives. Revenues were up by 7% in H119, or 5% at constant currency, vs revenues up 10% in H118. The key categories of fruit and vegetables, tea and sugar-reduction continue to drive the business. Citrus remains the largest category, though at present it is witnessing some weakness due to lower raw material prices. Nevertheless, the rest of the business continues to grow, and management’s outlook for FY19 remains unchanged.
Written by
Treatt |
Another positive half |
H1 trading update |
Food & beverages |
5 April 2019 |
Share price performance
Business description
Next events
Analysts
Treatt is a research client of Edison Investment Research Limited |
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The last few years have seen Treatt grow at a spectacular rate, and although – as expected – the growth has moderated, it demonstrates that momentum persists in the business, and management has continued to build on prior growth despite the demanding comparatives. Revenues were up by 7% in H119, or 5% at constant currency, vs revenues up 10% in H118. The key categories of fruit and vegetables, tea and sugar-reduction continue to drive the business. Citrus remains the largest category, though at present it is witnessing some weakness due to lower raw material prices. Nevertheless, the rest of the business continues to grow, and management’s outlook for FY19 remains unchanged.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/17 |
101.3 |
12.8 |
18.5 |
4.8 |
20.9 |
1.2 |
09/18 |
112.2 |
13.8 |
20.3 |
5.1 |
19.1 |
1.3 |
09/19e |
116.1 |
14.2 |
18.8 |
5.1 |
20.6 |
1.3 |
09/20e |
120.7 |
14.8 |
19.7 |
5.3 |
19.7 |
1.4 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
US expansion complete, UK relocation continues
A key part of Treatt’s current strategy is to expand its capacity in order to satisfy increasing demand for its products. The expansion of its US facility was completed in March, on budget and on schedule, and is due to become fully operational by June 2019. The UK relocation project – which is more complex – was delayed by around six months compared to the original schedule as the design phase took longer than expected, but now remains on track for construction to begin during Q4 of FY19 (Q419) and occupancy to begin in Q420.
Treatt remains in the sweet spot
As expected, revenue growth has moderated over the past 18 months, as FY17 witnessed exceptional growth of 24.5%. Underlying revenue growth of 5% in H119 is more sustainable and demonstrates that the company is successfully embracing the sweet spot in flavour ingredients. Its 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 organic revenue growth of 5% was achieved, despite pressure on citrus pricing due to raw materials weakness, demonstrates the strength of Treatt’s portfolio.
Valuation: Attractive ingredients play
We value Treatt using a DCF model, which indicates a fair value of 510p (unchanged). Treatt trades at 19.7x FY20e P/E and 13.4x FY20e EV/EBITDA. On both P/E and EV/EBITDA it trades at a c 20% discount to its peer group. We note that although hedging is in place to mitigate any FX impact on the P&L, in the shorter term the weakening dollar will lead to a negative FX impact on the H1 results.
Valuation
We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 1 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 1: Comparative valuation
Market cap (m) |
P/E (x) |
EV/EBITDA (x) |
Dividend yield (%) |
|||||
2019e |
2020e |
2019e |
2020e |
2019e |
2020e |
|||
Givaudan |
CHF 22,931 |
27.5 |
25.4 |
19.4 |
18.1 |
2.5 |
2.7 |
|
IFF |
$14,061 |
20.8 |
18.7 |
15.7 |
14.3 |
2.1 |
2.2 |
|
Symrise |
CHF 11,100 |
32.5 |
28.3 |
17.6 |
15.8 |
1.2 |
1.4 |
|
Chr Hansen |
DKK 84,296 |
43.4 |
38.4 |
28.6 |
25.7 |
1.7 |
1.9 |
|
Kerry |
€ 17,082 |
24.8 |
22.8 |
18.1 |
16.8 |
0.8 |
0.9 |
|
Ingredion |
$6,286 |
13.3 |
12.4 |
8.1 |
7.7 |
2.6 |
2.7 |
|
Peer group average |
27.0 |
24.3 |
17.9 |
16.4 |
1.8 |
2.0 |
||
Treatt |
223.1 |
20.6 |
19.7 |
15.8 |
13.4 |
1.3 |
1.4 |
|
Premium/(discount) to peer group (%) |
(23.9%) |
(19.0%) |
(11.6%) |
(18.6%) |
(27.6%) |
(29.8%) |
||
Source: Refinitiv, Edison Investment Research. Note: Prices as of 4 April 2019.
Our DCF-derived fair value is unchanged at 510p as our forecasts are unchanged. 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 2: Financial summary
£000s |
2016 |
2017 |
2018 |
2019e |
2020e |
2021e |
||
Year end 30 September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
88,040 |
101,250 |
112,163 |
116,089 |
120,732 |
125,562 |
Cost of Sales |
(67,639) |
(75,985) |
(84,407) |
(88,058) |
(91,339) |
(94,867) |
||
Gross Profit |
20,401 |
25,265 |
27,756 |
28,031 |
29,394 |
30,695 |
||
EBITDA |
|
|
11,604 |
15,049 |
16,627 |
15,837 |
18,617 |
19,437 |
Operating Profit (before amort., except and sbp.) |
|
|
10,257 |
13,650 |
15,108 |
14,135 |
14,946 |
15,686 |
Intangible Amortisation |
(142) |
(137) |
(124) |
0 |
0 |
0 |
||
Share based payments |
(566) |
(966) |
(1,040) |
(1,096) |
(1,144) |
(1,207) |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
9,549 |
12,547 |
13,944 |
13,039 |
13,802 |
14,480 |
||
Net Interest |
(703) |
(851) |
(1,302) |
49 |
(135) |
(70) |
||
Exceptionals |
(553) |
0 |
(1,105) |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
9,554 |
12,799 |
13,806 |
14,184 |
14,811 |
15,616 |
Profit Before Tax (FRS 3) |
|
|
8,293 |
11,696 |
11,537 |
13,088 |
13,667 |
14,410 |
Profit Before Tax (company) |
|
|
8,846 |
11,696 |
12,642 |
13,088 |
13,667 |
14,410 |
Tax |
(2,144) |
(3,129) |
(2,284) |
(3,337) |
(3,485) |
(3,675) |
||
Profit After Tax (norm) |
7,410 |
9,670 |
11,522 |
10,846 |
11,326 |
11,942 |
||
Profit After Tax (FRS 3) |
6,149 |
8,567 |
9,253 |
9,750 |
10,182 |
10,735 |
||
Discontinued operations |
2,976 |
|||||||
Average Number of Shares Outstanding (m) |
51.9 |
52.2 |
56.8 |
57.5 |
57.5 |
57.5 |
||
EPS - normalised (p) |
|
|
14.3 |
18.5 |
20.3 |
18.8 |
19.7 |
20.7 |
EPS - normalised & fully diluted (p) |
|
|
14.1 |
17.9 |
19.8 |
18.6 |
19.4 |
20.5 |
EPS - (IFRS) (p) |
|
|
11.8 |
16.4 |
21.5 |
17.0 |
17.7 |
18.7 |
Dividend per share (p) |
51.9 |
52.2 |
56.8 |
57.5 |
57.5 |
57.5 |
||
Gross Margin (%) |
23.2 |
25.0 |
24.7 |
24.1 |
24.3 |
24.4 |
||
EBITDA Margin (%) |
13.2 |
14.9 |
14.8 |
13.6 |
15.4 |
15.5 |
||
Operating Margin (before GW and except.) (%) |
11.7 |
13.5 |
13.5 |
12.2 |
12.4 |
12.5 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
16,161 |
19,532 |
21,863 |
43,321 |
54,462 |
49,094 |
Intangible Assets |
3,364 |
3,331 |
752 |
752 |
752 |
752 |
||
Tangible Assets |
11,361 |
14,821 |
20,038 |
41,496 |
52,637 |
47,269 |
||
Investments |
1,436 |
1,380 |
1,073 |
1,073 |
1,073 |
1,073 |
||
Current Assets |
|
|
54,435 |
68,230 |
102,401 |
102,706 |
105,039 |
107,446 |
Stocks |
29,990 |
42,878 |
39,642 |
40,797 |
42,188 |
43,624 |
||
Debtors |
17,853 |
19,973 |
28,828 |
29,605 |
30,548 |
31,518 |
||
Cash |
6,588 |
4,748 |
32,304 |
32,304 |
32,304 |
32,304 |
||
Other |
4 |
631 |
1,627 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(16,388) |
(27,003) |
(35,781) |
(40,268) |
(43,818) |
(36,081) |
Creditors |
(15,834) |
(19,266) |
(16,479) |
(16,611) |
(16,672) |
(16,711) |
||
Short term borrowings |
(487) |
(7,680) |
(19,244) |
(23,656) |
(27,146) |
(19,370) |
||
Provisions |
(67) |
(57) |
(58) |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(17,021) |
(14,281) |
(6,858) |
(16,485) |
(18,030) |
(13,942) |
Long term borrowings |
(7,755) |
(7,293) |
(3,001) |
(11,828) |
(13,573) |
(9,685) |
||
Other long term liabilities |
(9,266) |
(6,988) |
(3,857) |
(4,657) |
(4,457) |
(4,257) |
||
Net Assets |
|
|
37,187 |
46,478 |
81,625 |
89,275 |
97,654 |
106,518 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
10,804 |
4,683 |
3,580 |
15,004 |
16,130 |
16,854 |
Net Interest |
(703) |
(913) |
(609) |
49 |
(135) |
(70) |
||
Tax |
(2,022) |
(2,822) |
(2,978) |
(3,337) |
(3,485) |
(3,675) |
||
Capex |
(679) |
(5,111) |
(6,190) |
(23,161) |
(14,811) |
1,617 |
||
Acquisitions/disposals |
(861) |
(1,667) |
8,357 |
1,100 |
0 |
0 |
||
Financing |
280 |
270 |
21,090 |
0 |
0 |
0 |
||
Dividends |
(2,095) |
(3,025) |
(2,876) |
(2,895) |
(2,933) |
(3,062) |
||
Net Cash Flow |
4,724 |
(8,585) |
20,374 |
(13,240) |
(5,234) |
11,664 |
||
Opening net debt/(cash) |
|
|
6,155 |
1,654 |
10,225 |
(10,059) |
3,180 |
8,414 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
(223) |
14 |
(90) |
1 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
1,654 |
10,225 |
(10,059) |
3,180 |
8,414 |
(3,249) |
Source: Edison Investment Research, Treatt data
|
|
Research: Financials
S&U’s FY19 results were close to expectations and changes to our prospective numbers are limited. The tightening of motor finance lending criteria and more modest receivables growth are prudent and should help protect prospective profitability at a point where there is considerable macro uncertainty. Small as yet, the property bridging business is developing well and has the potential to augment growth usefully in future.