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Research: Consumer
Treatt has once again delivered an exceptional performance in the first four months of FY21, with strong momentum across multiple categories contributing to growth. Operating margins have benefited from the improved product mix as Treatt continues to move up the value chain and partners with its customers to develop new products. Despite only being four months into the new financial year, the board is cautiously optimistic about continued growth and exceeding current market expectations. We raise our sales forecasts by 7–10% over the next three years and our operating profit and earnings forecasts by 20–32%. Our fair value also moves up to 870p.
Written by
Treatt |
Another Treat(t) |
Trading update |
Food & beverages |
22 January 2021 |
Share price performance
Business description
Next events
Analysts
Treatt is a research client of Edison Investment Research Limited |
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Treatt has once again delivered an exceptional performance in the first four months of FY21, with strong momentum across multiple categories contributing to growth. Operating margins have benefited from the improved product mix as Treatt continues to move up the value chain and partners with its customers to develop new products. Despite only being four months into the new financial year, the board is cautiously optimistic about continued growth and exceeding current market expectations. We raise our sales forecasts by 7–10% over the next three years and our operating profit and earnings forecasts by 20–32%. Our fair value also moves up to 870p.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/19 |
112.7 |
14.0 |
19.0 |
5.5 |
39.9 |
0.7% |
09/20 |
109.0 |
15.8 |
21.3 |
6.0 |
35.6 |
0.8% |
09/21e |
123.2 |
19.4 |
26.4 |
7.5 |
28.8 |
1.0% |
09/22e |
130.6 |
21.5 |
29.3 |
8.3 |
26.0 |
1.1% |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Step change in growth
Treatt has transformed itself from a commodity-based ingredients trading house into a supplier of value-added ingredients and ingredient solutions, and its financial performance reflects this change. Its technical expertise is being utilised across a growing range of applications, which has led to revenue growth and margin expansion. We believe this is likely to continue beyond FY21, hence our forecast of continued strong growth in both revenues and margins in FY22 and FY23.
Demand remains strong
The demand for flavour ingredients remains strong and, indeed, the COVID-19 pandemic has resulted in consumers increasingly focusing on health and wellbeing, thus demanding authentic flavours with clean labels. The beverages market has seen a switch from the on-trade to the off-trade channel as restrictions have been imposed globally. For beverages companies this has typically resulted in margin erosion, while for the flavour industry the more important metric is overall volume consumed and Treatt has seen an overall increase in demand for its products.
Valuation: At a premium to its peers
We value Treatt using a DCF model, which indicates a fair value of 870p (up from 670p). We have raised our operating forecasts materially for this year, but we expect the momentum to continue and hence have also raised our FY22 and FY23 forecasts. For FY21e Treatt trades at 28.8x P/E and 19.5x EV/EBITDA. This is broadly in line with its peer group in both cases.
Forecasts
In light of the current trading trends discussed above, we raise our forecasts for FY21–23 as detailed in Exhibit 1. We expect the current momentum to continue, but also expect the mix to keep improving through FY22 and FY23, thus delivering an acceleration in sales and operating performance. Given the significantly better performance we are expecting, we have also raised our capex forecasts for FY22 and FY23 as we assume more investment will be required to fulfil the increased demand. We have also increased our dividend per share forecasts, in light of increased EPS expectations.
Exhibit 1: Old versus new key P&L forecasts
2021 |
2022 |
2023 |
|||||||
Old |
New |
Diff |
Old |
New |
Diff |
Old |
New |
Diff |
|
Revenue |
114,467 |
123,188 |
7.6% |
119,045 |
130,579 |
9.7% |
123,807 |
138,414 |
11.8% |
Operating profit |
15,160 |
18,163 |
19.8% |
16,004 |
20,166 |
26.0% |
16,892 |
22,345 |
32.3% |
PBT* |
15,166 |
18,147 |
19.7% |
16,053 |
20,162 |
25.6% |
17,006 |
22,385 |
31.6% |
PBT (pre-exceptional) Edison |
16,221 |
19,397 |
19.6% |
17,156 |
21,533 |
25.5% |
18,163 |
23,894 |
31.6% |
Basic EPS* |
20.3 |
24.3 |
19.7% |
21.5 |
27.0 |
25.6% |
22.7 |
29.9 |
31.6% |
Basic EPS (pre-exceptional) Edison |
22.0 |
26.3 |
19.6% |
23.3 |
29.2 |
25.5% |
24.7 |
32.4 |
31.5% |
Source: Edison Investment Research. Note: *Stated on an FRS/reported basis.
Valuation
We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 2 below. For 2021, Treatt trades broadly in line with its peer group on both P/E and EV/EBITDA. Although it is smaller than its peers, its portfolio of products is increasingly specialised and the company has demonstrated its resilience with robust performance despite the COVID-19 pandemic.
Exhibit 2: Comparative valuation
Market cap (m) |
P/E (x) |
EV/EBITDA (x) |
Dividend yield (%) |
|||||
2020e |
2021e |
2020e |
2021e |
2020e |
2021e |
|||
Givaudan |
CHF32,779 |
38.4 |
35.9 |
26.2 |
25.1 |
1.8 |
1.9 |
|
IFF |
$12,841 |
21.5 |
19.8 |
16.1 |
14.8 |
2.5 |
2.8 |
|
Symrise |
CHF13,610 |
38.5 |
35.4 |
19.9 |
18.9 |
1.0 |
1.1 |
|
Chr Hansen |
DKK71,996 |
37.1 |
43.1 |
26.8 |
28.3 |
1.5 |
1.6 |
|
Kerry |
€19,830 |
32.7 |
28.8 |
22.1 |
20.1 |
0.7 |
0.8 |
|
Ingredion |
$5,300 |
13.3 |
12.3 |
8.3 |
7.7 |
3.3 |
3.3 |
|
Peer group average |
30.4 |
30.3 |
20.3 |
19.9 |
1.9 |
1.8 |
||
Treatt |
£453 |
35.6 |
28.8 |
26.8 |
19.5 |
0.8 |
1.0 |
|
Premium/(discount) to peer group (%) |
17.8% |
(1.3%) |
34.5% |
1.8% |
(56.5%) |
(48.6%) |
||
Source: Refinitiv, Edison Investment Research. Note: Priced at 21 January 2021.
Our DCF-derived fair value increases to 870p given our increased short-term forecasts. Our WACC has fallen to 5.8% (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%). We leave our medium-term sales growth assumption of 5.0% pa unchanged, falling to 2% growth in perpetuity (also unchanged). We note that a medium-term sales growth of 5.5% would lift our fair value to c 900p, as illustrated in Exhibit 3.
Exhibit 3: DCF sensitivity to terminal growth rate and sales growth (p/share)
Sales growth |
||||||
4.0% |
4.5% |
5.0% |
5.5% |
6.0% |
||
Terminal growth |
-1.0% |
557 |
571 |
586 |
601 |
616 |
0.0% |
614 |
631 |
647 |
664 |
682 |
|
1.0% |
696 |
715 |
735 |
755 |
775 |
|
2.0% |
822 |
845 |
869 |
893 |
919 |
|
3.0% |
1038 |
1069 |
1100 |
1133 |
1166 |
|
4.0% |
1502 |
1549 |
1596 |
1646 |
1696 |
|
Source: Edison Investment Research
Exhibit 4: Financial summary
£000s |
2017 |
2018 |
2019 |
2020 |
2021e |
2022e |
2023e |
||
Year-end September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||||
Revenue |
|
|
101,250 |
112,163 |
112,717 |
109,016 |
123,188 |
130,579 |
138,414 |
Cost of Sales |
(75,985) |
(84,407) |
(84,060) |
(77,140) |
(86,552) |
(91,092) |
(95,866) |
||
Gross Profit |
25,265 |
27,756 |
28,657 |
31,876 |
36,636 |
39,487 |
42,548 |
||
EBITDA |
|
|
15,049 |
16,627 |
15,785 |
17,862 |
23,322 |
28,048 |
30,495 |
Operating Profit (before amort., except and sbp.) |
|
|
13,650 |
15,108 |
14,226 |
16,053 |
19,413 |
21,539 |
23,855 |
Intangible Amortisation |
(137) |
(124) |
(90) |
(75) |
(64) |
(54) |
(46) |
||
Share based payments |
(966) |
(1,040) |
(637) |
(886) |
(1,186) |
(1,318) |
(1,464) |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
12,547 |
13,944 |
13,499 |
15,092 |
18,163 |
20,166 |
22,345 |
||
Net Interest |
(851) |
(1,302) |
(199) |
(291) |
(14) |
2 |
53 |
||
Exceptionals |
0 |
(1,105) |
(755) |
(1,060) |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
12,799 |
13,806 |
14,027 |
15,762 |
19,399 |
21,540 |
23,908 |
Profit Before Tax (FRS 3) |
|
|
11,696 |
11,537 |
12,545 |
13,741 |
18,149 |
20,168 |
22,398 |
Profit Before Tax (company) |
|
|
11,696 |
12,642 |
13,300 |
14,801 |
18,149 |
20,168 |
22,398 |
Tax |
(3,129) |
(2,284) |
(2,673) |
(2,896) |
(3,630) |
(4,034) |
(4,480) |
||
Profit After Tax (norm) |
9,670 |
11,392 |
11,263 |
12,762 |
15,769 |
17,507 |
19,428 |
||
Profit After Tax (FRS 3) |
8,567 |
9,253 |
9,872 |
10,845 |
14,519 |
16,135 |
17,918 |
||
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 |
26.4 |
29.3 |
32.5 |
EPS - adjusted (p) |
|
|
18.3 |
18.0 |
17.8 |
19.7 |
24.3 |
27.0 |
29.9 |
EPS - (IFRS) (p) |
|
|
16.4 |
16.3 |
16.7 |
18.1 |
24.3 |
27.0 |
29.9 |
Dividend per share (p) |
4.8 |
5.1 |
5.5 |
6.0 |
7.5 |
8.3 |
9.3 |
||
Gross Margin (%) |
25.0 |
24.7 |
25.4 |
29.2 |
29.7 |
30.2 |
30.7 |
||
EBITDA Margin (%) |
14.9 |
14.8 |
14.0 |
16.4 |
18.9 |
21.5 |
22.0 |
||
Operating Margin (before GW and except.) (%) |
13.5 |
13.5 |
12.6 |
14.7 |
15.8 |
16.5 |
17.2 |
||
BALANCE SHEET |
|||||||||
Fixed Assets |
|
|
19,532 |
21,863 |
31,730 |
54,048 |
62,250 |
61,146 |
61,536 |
Intangible Assets |
3,331 |
752 |
845 |
1,358 |
1,294 |
1,240 |
1,194 |
||
Tangible Assets |
14,821 |
20,038 |
29,485 |
50,159 |
59,598 |
58,548 |
58,984 |
||
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 |
75,291 |
78,953 |
91,617 |
Stocks |
42,878 |
39,642 |
36,799 |
36,050 |
40,490 |
42,658 |
44,941 |
||
Debtors |
19,973 |
28,828 |
23,020 |
24,167 |
27,062 |
28,555 |
30,130 |
||
Cash |
4,748 |
32,304 |
37,187 |
7,739 |
7,739 |
7,739 |
16,545 |
||
Other |
631 |
1,627 |
1,152 |
1,516 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(27,003) |
(35,781) |
(28,905) |
(15,989) |
(20,693) |
(13,930) |
(13,201) |
Creditors |
(19,266) |
(16,479) |
(11,784) |
(12,640) |
(12,981) |
(13,107) |
(13,201) |
||
Short term borrowings |
(7,680) |
(19,244) |
(16,860) |
(3,203) |
(7,712) |
(823) |
0 |
||
Provisions |
(57) |
(58) |
(261) |
(146) |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(14,281) |
(6,858) |
(13,876) |
(16,411) |
(17,617) |
(13,973) |
(13,361) |
Long term borrowings |
(7,293) |
(3,001) |
(4,369) |
(3,450) |
(3,856) |
(412) |
0 |
||
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 |
99,232 |
112,196 |
126,591 |
CASH FLOW |
|||||||||
Operating Cash Flow |
|
|
4,683 |
3,580 |
20,544 |
15,677 |
16,326 |
24,312 |
26,532 |
Net Interest |
(913) |
(609) |
(199) |
(191) |
(14) |
2 |
53 |
||
Tax |
(2,822) |
(2,978) |
(2,208) |
(2,191) |
(3,630) |
(4,034) |
(4,480) |
||
Capex |
(5,111) |
(6,190) |
(10,392) |
(23,909) |
(13,348) |
(5,459) |
(7,076) |
||
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) |
(4,488) |
(4,987) |
||
Net Cash Flow |
(8,585) |
20,374 |
6,142 |
(15,102) |
(4,256) |
10,334 |
10,041 |
||
Opening net debt/(cash) |
|
|
1,654 |
10,225 |
(10,059) |
(15,958) |
(427) |
3,829 |
(6,504) |
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) |
3,829 |
(6,504) |
(16,545) |
Source: Edison Investment Research, company data
|
|
Research: Financials
Secure Trust Bank’s (STB) pre-close update confirms the upbeat trends evident in its Q3 update in November. The strong lending rebound continued into Q4, loan repayment holidays are at low levels, and the balance sheet has remained robust and liquid. STB reiterated that its FY20 PBT would be well ahead of £9.7m (we forecast £13.0m). However, the new COVID-19 restrictions introduced in December 2020 have affected consumer loan demand into 2021, as well as the Motor Finance business. Management expects to be better placed to disclose its outlook for FY21 when STB’s FY20 results are released on 25 March. Our forecasts (FY21 PBT £31.6m, ROE 9.1%) and fair value (1,756p per share) remain unchanged.