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Research: Consumer
Despite the surprise trading statement of 23 February, which led us to raise our sales forecasts by c 10% and PBT and EPS by c 20-30%, Treatt has yet again upgraded its outlook for FY17, which leads us to raise our EPS forecasts again by c 6-9%. Our fair value increases to 401p (from 350p) as a result. The constant stream of upgrades demonstrates the strength of momentum in the business as the company moves further up the value chain.
Written by
Treatt |
Another upward surprise |
H117 trading update |
Food & beverages |
7 April 2017 |
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Despite the surprise trading statement of 23 February, which led us to raise our sales forecasts by c 10% and PBT and EPS by c 20-30%, Treatt has yet again upgraded its outlook for FY17, which leads us to raise our EPS forecasts again by c 6-9%. Our fair value increases to 401p (from 350p) as a result. The constant stream of upgrades demonstrates the strength of momentum in the business as the company moves further up the value chain.
Year |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/16 |
88.0 |
9.6 |
14.3 |
4.4 |
26.7 |
1.2 |
09/17e |
102.1 |
13.6 |
20.0 |
6.1 |
19.1 |
1.6 |
09/18e |
107.2 |
14.4 |
21.2 |
6.5 |
18.0 |
1.7 |
09/19e |
111.5 |
14.9 |
22.0 |
6.7 |
17.4 |
1.8 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Strategy delivering excellent results
Treatt’s long-term strategy is to deliver consistent, sustainable growth in profit through developing value-added ingredient solutions, coupled with effective cost control. Improved customer focus and closer relationships are a key part of this strategy, with the ultimate goal of delivering greater profitability by concentrating on the more value-added segments. This goal has been delivered consistently over the past few years, with results often beating expectations, and momentum is now accelerating, with more frequent and more significant upgrades coming through. As a result of the trading update, we yet again upgrade our full-year forecasts for 2017-19 to reflect the improved outlook. Our sales forecasts move up c 0-3%, while PBT and EPS increase by c 6-9%, as Treatt’s move up the value chain should deliver a strong improvement in margins.
Momentum remains strong
Trading has continued to be strong, with H117 sales c 25% above those of the previous year. A stronger US$ accounts for part of this (c 10%), but the remainder is due to impressive organic growth. Sugar reduction, tea and citrus continue to be the key areas of focus and this is paying dividends, with particularly strong growth in these segments. The ingredients space remains attractive, with higher than average growth vis-à-vis the wider consumer space, as consumers demand cleaner labels and healthier products, but with no compromise on taste. Margins are also typically high at the value-added end as these ingredients are highly specialised and deliver key attributes to the products.
Valuation: Fair value of 401p
Our DCF-derived fair value is 401p (previously 350p), c 6% upside to the current share price. The move is driven by our forecast upgrades and our increased confidence in the business given the positive momentum, which leads us to increase our terminal EBIT margin assumption to 15% (from 13%).
Forecast revisions
We detail our key changes to P&L forecasts in Exhibit 1 below. We have upgraded our FY17 forecasts to reflect the excellent H117 and the strong momentum going into H2, as Treatt is accelerating its move up the value chain, and order books for the remainder of FY17 and for FY18 are accelerating upwards. We leave our FY18 and FY19 sales forecasts broadly unchanged, but continue to see potential for further upgrades. Improved sales growth should lead to operating leverage, and the move towards value-added products should continue to be beneficial to margins. Our EPS forecasts therefore move up by c 6-9%.
Exhibit 1: Old vs new key P&L forecasts
EPS* (p) |
PBT* (£000s) |
Sales (£000s) |
|||||||
Old |
New |
% change |
Old |
New |
% change |
Old |
New |
% change |
|
2017e |
16.5 |
18.0 |
9.0 |
11,525 |
12,560 |
9.0 |
99,485 |
102,126 |
2.7 |
2018e |
18.1 |
19.2 |
5.7 |
12,629 |
13,353 |
5.7 |
107,444 |
107,233 |
(0.2) |
2019e |
18.8 |
19.8 |
5.8 |
13,063 |
13,816 |
5.8 |
111,742 |
111,522 |
(0.2) |
Source: Edison Investment Research. Note: *EPS and PBT are stated on a company normalised basis, which is pre-exceptional but after amortisation of acquired intangibles and share-based payments.
Sensitivities
Despite 60% of turnover being exposed to the ‘defensive’ beverage sector, Treatt has two key sensitivities, which it seeks to mitigate through the in-depth knowledge and skill base of its buying team and by undertaking an active hedging policy where possible:
■
Commodity exposure: namely citrus oils, which make up c 30% of revenues.
■
Foreign exchange: translation risk on US dollar profits, which it manages through hedging.
Exhibit 2: Financial summary
£000's |
2014 |
2015 |
2016 |
2017e |
2018e |
2019e |
||
Year-end September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
79,189 |
85,934 |
88,040 |
102,126 |
107,233 |
111,522 |
Cost of Sales |
(61,218) |
(66,955) |
(67,639) |
(76,623) |
(80,132) |
(83,115) |
||
Gross Profit |
17,971 |
18,979 |
20,401 |
25,503 |
27,100 |
28,407 |
||
EBITDA |
|
|
9,068 |
10,307 |
11,604 |
15,843 |
17,067 |
18,073 |
Operating Profit (before amort., except and sbp.) |
|
|
7,846 |
9,063 |
10,257 |
14,141 |
15,280 |
16,214 |
Intangible Amortisation |
(172) |
(175) |
(142) |
(160) |
(160) |
(160) |
||
Share based payments |
(46) |
(198) |
(566) |
(861) |
(916) |
(947) |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
7,628 |
8,690 |
9,549 |
13,119 |
14,204 |
15,107 |
||
Net Interest |
(724) |
(740) |
(703) |
(559) |
(851) |
(1,291) |
||
Exceptionals |
(1,402) |
(174) |
(553) |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
7,122 |
8,323 |
9,554 |
13,582 |
14,429 |
14,923 |
Profit Before Tax (FRS 3) |
|
|
5,502 |
7,776 |
8,293 |
12,560 |
13,353 |
13,816 |
Profit Before Tax (company) |
|
|
6,904 |
7,950 |
8,846 |
12,560 |
13,353 |
13,816 |
Tax |
(1,553) |
(1,786) |
(2,144) |
(3,203) |
(3,405) |
(3,523) |
||
Profit After Tax (norm) |
5,326 |
6,537 |
7,410 |
10,379 |
11,024 |
11,400 |
||
Profit After Tax (FRS 3) |
3,949 |
5,990 |
6,149 |
9,357 |
9,948 |
10,293 |
||
Average Number of Shares Outstanding (m) |
51.3 |
51.5 |
51.9 |
51.9 |
51.9 |
51.9 |
||
EPS - normalised (p) |
|
|
10.4 |
12.7 |
14.3 |
20.0 |
21.2 |
22.0 |
EPS - normalised & fully diluted (p) |
|
|
10.3 |
12.6 |
14.1 |
19.7 |
20.9 |
21.6 |
EPS - (IFRS) (p) |
|
|
7.7 |
11.6 |
11.8 |
18.0 |
19.2 |
19.8 |
Dividend per share (p) |
3.8 |
4.0 |
4.4 |
6.1 |
6.5 |
6.7 |
||
Gross Margin (%) |
22.7 |
22.1 |
23.2 |
25.0 |
25.3 |
25.5 |
||
EBITDA Margin (%) |
11.5 |
12.0 |
13.2 |
15.5 |
15.9 |
16.2 |
||
Operating Margin (before GW and except.) (%) |
9.9 |
10.5 |
11.7 |
13.8 |
14.2 |
14.5 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
13,777 |
13,381 |
16,161 |
22,331 |
39,992 |
43,146 |
Intangible Assets |
1,801 |
1,736 |
3,364 |
3,204 |
3,044 |
2,884 |
||
Tangible Assets |
10,994 |
10,998 |
11,361 |
17,691 |
35,512 |
38,826 |
||
Investments |
982 |
647 |
1,436 |
1,436 |
1,436 |
1,436 |
||
Current Assets |
|
|
43,590 |
45,045 |
54,435 |
51,913 |
52,875 |
53,743 |
Stocks |
28,020 |
25,799 |
29,990 |
31,214 |
31,702 |
31,855 |
||
Debtors |
14,509 |
17,635 |
17,853 |
20,199 |
20,673 |
21,388 |
||
Cash |
629 |
1,477 |
6,588 |
500 |
500 |
500 |
||
Other |
432 |
134 |
4 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(16,005) |
(13,481) |
(16,388) |
(17,795) |
(25,483) |
(23,274) |
Creditors |
(12,729) |
(12,675) |
(15,834) |
(16,817) |
(17,658) |
(18,365) |
||
Short term borrowings |
(2,356) |
(567) |
(487) |
(978) |
(7,825) |
(4,909) |
||
Provisions |
(920) |
(239) |
(67) |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(12,602) |
(11,760) |
(17,021) |
(9,801) |
(13,024) |
(11,367) |
Long term borrowings |
(7,857) |
(7,065) |
(7,755) |
(489) |
(3,912) |
(2,455) |
||
Other long term liabilities |
(4,745) |
(4,695) |
(9,266) |
(9,312) |
(9,112) |
(8,912) |
||
Net Assets |
|
|
28,760 |
33,185 |
37,187 |
46,648 |
54,360 |
62,249 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
3,528 |
8,667 |
10,804 |
14,739 |
16,746 |
17,711 |
Net Interest |
(724) |
(740) |
(703) |
(559) |
(851) |
(1,291) |
||
Tax |
(1,552) |
(1,469) |
(2,022) |
(3,203) |
(3,405) |
(3,523) |
||
Capex |
(538) |
(924) |
(679) |
(8,032) |
(19,608) |
(5,173) |
||
Acquisitions/disposals |
(208) |
(103) |
(861) |
0 |
0 |
0 |
||
Financing |
105 |
147 |
280 |
0 |
0 |
0 |
||
Dividends |
(1,899) |
(1,978) |
(2,095) |
(2,257) |
(3,152) |
(3,351) |
||
Net Cash Flow |
(1,288) |
3,600 |
4,724 |
688 |
(10,271) |
4,373 |
||
Opening net debt/(cash) |
|
|
8,294 |
9,584 |
6,155 |
1,654 |
966 |
11,237 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
(2) |
(171) |
(223) |
(0) |
(0) |
0 |
||
Closing net debt/(cash) |
|
|
9,584 |
6,155 |
1,654 |
966 |
11,237 |
6,864 |
Source: Edison Investment Research, Treatt
|
|
Research: Financials
Park has given a trading update covering the financial year that ended on 31 March 2017 ahead of the preliminary results announcement scheduled for 13 June 2017. Second half trading has maintained the momentum that was reported with the interims, delivering further good progress and an expected full year result in line with market expectations. Early indications for the coming year are also positive, with order levels ahead of their position at the same time last year, and management expresses confidence for a strong year ahead.