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Market capitalisation
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Research: Consumer
Treatt’s FY19 results are testament to the resilience of the business: despite a 10% revenue decline in the citrus segment – caused by a sharp fall in citrus input prices – 16% growth in Treatt’s broadened portfolio of non-citrus revenues resulted in overall reported revenue up 0.5% (-2% at constant currency), in line with our estimates. The key non-citrus categories of tea, health & wellness and fruit & vegetables continue to perform exceptionally well and the company has recently entered the coffee space, which is expected to provide further growth opportunities. Management’s outlook for FY20 is positive, despite citrus pricing continuing to show weakness. Our fair value remains unchanged at 530p.
Written by
Treatt |
Balanced portfolio shines through |
FY19 results |
Food & beverages |
26 November 2019 |
Share price performance
Business description
Next events
Analysts
Treatt is a research client of Edison Investment Research Limited |
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Treatt’s FY19 results are testament to the resilience of the business: despite a 10% revenue decline in the citrus segment – caused by a sharp fall in citrus input prices – 16% growth in Treatt’s broadened portfolio of non-citrus revenues resulted in overall reported revenue up 0.5% (-2% at constant currency), in line with our estimates. The key non-citrus categories of tea, health & wellness and fruit & vegetables continue to perform exceptionally well and the company has recently entered the coffee space, which is expected to provide further growth opportunities. Management’s outlook for FY20 is positive, despite citrus pricing continuing to show weakness. Our fair value remains unchanged at 530p.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/18 |
112.2 |
13.8 |
20.3 |
5.1 |
21.6 |
1.2 |
09/19 |
112.7 |
14.0 |
19.2 |
5.5 |
22.8 |
1.3 |
09/20e |
115.0 |
14.8 |
18.9 |
5.8 |
23.2 |
1.3 |
09/21e |
119.6 |
15.8 |
20.3 |
6.2 |
21.6 |
1.4 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Diversified business provides growth opportunities
Treatt’s clean-label innovations continue to resonate with consumer demand for better-for-you/natural products, as consumers continue to look for premium beverage propositions with positive health connections. Although Treatt’s citrus segment represented 54% of total revenue in FY19, and citrus pricing was down significantly, the company’s strategic shift over time to a more diversified range of value-added products that are less correlated to external market movements served as a mitigating factor.
UK relocation remains on schedule
The UK relocation continues, with occupancy scheduled for fiscal Q420. In addition to increased capacity, the UK relocation should also accelerate Treatt’s partnership-based model with customers, hence allowing enhanced profitability. FY19 witnessed the completion of the US expansion, which occurred on budget and on schedule. The capacity in non-citrus was doubled, while the size of the technical and innovation centre was quadrupled.
Valuation: Remains attractive
We value Treatt using a DCF model, which indicates a fair value of 530p, unchanged since our note released with October’s trading update. On a calendarised basis Treatt trades at 22.7x FY20e P/E and 14.9x FY20e EV/EBITDA. On both P/E and EV/EBITDA multiples it trades at a c 10% discount to its peer group.
FY19 results
Treatt’s FY19 results were broadly in line with our expectations and with the recent trading update. Revenues were £112.7m and adjusted PBT was £13.3m, exactly in line with our forecasts. Adjusted EPS (as defined by Treatt) were down 1% to 17.8p due to the small increase in the effective tax rate and the full year effect of the 10% equity placing and LTIP (Long Term Investment Plan) in the prior year. We illustrate the very slight changes to our P&L forecasts in Exhibit 1 below.
Exhibit 1: Old vs new key P&L forecasts
2019 |
2020e |
2021e |
|||||||
Year end September (£m) |
Forecast |
Actual |
Diff |
Old |
New |
Diff |
Old |
New |
Diff |
Revenue |
112,724 |
112,717 |
0.0% |
114,978 |
114,971 |
0.0% |
119,577 |
119,570 |
0.0% |
PBT* |
13,250 |
13,300 |
0.4% |
13,979 |
14,029 |
0.4% |
14,990 |
15,042 |
0.3% |
Adjusted EPS (continuing) (p)* |
16.7 |
17.8 |
6.6% |
17.6 |
17.7 |
0.2% |
18.9 |
18.9 |
0.2% |
Source: Company data, Edison Investment Research. Note: *As defined by Treatt, excluding exceptional items and discontinued operations.
Valuation
We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 2 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 2: Comparative valuation
Market cap (m) |
P/E (x) |
EV/EBITDA (x) |
Dividend yield (%) |
|||||
2019e |
2020e |
2019e |
2020e |
2019e |
2020e |
|||
Givaudan |
CHF 26,796 |
33.4 |
30.1 |
23.3 |
21.2 |
2.2 |
2.3 |
|
IFF |
$14,616 |
22.2 |
21.0 |
16.8 |
15.7 |
2.1 |
2.2 |
|
Symrise |
CHF 14,616 |
35.4 |
30.1 |
18.1 |
16.0 |
1.2 |
1.3 |
|
Chr Hansen |
DKK 67,497 |
35.2 |
32.4 |
23.5 |
22.0 |
2.3 |
1.9 |
|
Kerry |
€ 20,354 |
29.4 |
26.8 |
21.1 |
19.3 |
0.7 |
0.7 |
|
Ingredion |
$5,585 |
12.8 |
12.2 |
7.8 |
7.5 |
2.8 |
2.9 |
|
Peer group average |
28.1 |
25.4 |
18.4 |
16.9 |
1.9 |
1.9 |
||
Treatt |
£259.0 |
22.9 |
22.7 |
16.2 |
14.9 |
1.3 |
1.3 |
|
Premium/(discount) to peer group (%) |
(18.4%) |
(10.6%) |
(12.3%) |
(12.1%) |
(31.8%) |
(28.5%) |
||
Source: Refinitiv, Edison Investment Research. Note: Prices as of 25 November 2019.
NB Treatt calanderised
Our DCF-derived fair value is unchanged at 530p. 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 3: Financial summary
£000's |
2016 |
2017 |
2018 |
2019 |
2020e |
2021e |
2022e |
|||
Year end September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|||
PROFIT & LOSS |
||||||||||
Revenue |
|
|
88,040 |
101,250 |
112,163 |
112,717 |
114,971 |
119,570 |
124,353 |
|
Cost of Sales |
(67,639) |
(75,985) |
(84,407) |
(84,060) |
(85,281) |
(88,453) |
(91,743) |
|||
Gross Profit |
20,401 |
25,265 |
27,756 |
28,657 |
29,690 |
31,117 |
32,610 |
|||
EBITDA |
|
|
11,604 |
15,049 |
16,627 |
15,785 |
16,896 |
19,116 |
20,076 |
|
Operating Profit (before amort., except and share-based payments) |
|
|
10,257 |
13,650 |
15,108 |
14,226 |
14,980 |
15,742 |
16,622 |
|
Intangible Amortisation |
(142) |
(137) |
(124) |
(90) |
(77) |
(65) |
(55) |
|||
Share based payments |
(566) |
(966) |
(1,040) |
(637) |
(674) |
(723) |
(766) |
|||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
|||
Operating Profit |
9,549 |
12,547 |
13,944 |
13,499 |
14,229 |
14,953 |
15,800 |
|||
Net Interest |
(703) |
(851) |
(1,302) |
(199) |
(200) |
88 |
144 |
|||
Exceptionals |
(553) |
0 |
(1,105) |
(755) |
0 |
0 |
0 |
|||
Profit Before Tax (norm) |
|
|
9,554 |
12,799 |
13,806 |
14,027 |
14,780 |
15,830 |
16,766 |
|
Profit Before Tax (FRS 3) |
|
|
8,293 |
11,696 |
11,537 |
12,545 |
14,029 |
15,042 |
15,945 |
|
Profit Before Tax (company) |
|
|
8,846 |
11,696 |
12,642 |
13,300 |
14,029 |
15,042 |
15,945 |
|
Tax |
(2,144) |
(3,129) |
(2,284) |
(2,673) |
(3,577) |
(3,836) |
(4,066) |
|||
Profit After Tax (norm) |
7,410 |
9,670 |
11,522 |
11,354 |
11,202 |
11,994 |
12,701 |
|||
Profit After Tax (FRS 3) |
6,149 |
8,567 |
9,253 |
9,872 |
10,452 |
11,206 |
11,879 |
|||
Discontinued operations |
0 |
978 |
2,976 |
(1,084) |
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 |
19.2 |
18.9 |
20.3 |
21.5 |
|
EPS - normalised & fully diluted (p) |
|
|
14.1 |
17.9 |
19.8 |
18.9 |
18.7 |
20.0 |
21.2 |
|
EPS - (IFRS) (p) |
|
|
11.8 |
16.4 |
18.0 |
17.8 |
17.7 |
18.9 |
20.1 |
|
Dividend per share (p) |
4.4 |
4.8 |
5.1 |
5.5 |
5.8 |
6.2 |
6.6 |
|||
Gross Margin (%) |
23.2 |
25.0 |
24.7 |
25.4 |
25.8 |
26.0 |
26.2 |
|||
EBITDA Margin (%) |
13.2 |
14.9 |
14.8 |
14.0 |
14.7 |
16.0 |
16.1 |
|||
Operating Margin (before GW and except.) (%) |
11.7 |
13.5 |
13.5 |
12.6 |
13.0 |
13.2 |
13.4 |
|||
BALANCE SHEET |
||||||||||
Fixed Assets |
|
|
16,161 |
19,532 |
21,863 |
31,730 |
44,462 |
39,316 |
36,171 |
|
Intangible Assets |
3,364 |
3,331 |
752 |
845 |
769 |
703 |
648 |
|||
Tangible Assets |
11,361 |
14,821 |
20,038 |
29,485 |
42,293 |
37,212 |
34,123 |
|||
Investments |
1,436 |
1,380 |
1,073 |
1,400 |
1,400 |
1,400 |
1,400 |
|||
Current Assets |
|
|
54,435 |
68,230 |
102,401 |
98,158 |
97,628 |
99,567 |
101,689 |
|
Stocks |
29,990 |
42,878 |
39,642 |
36,799 |
37,190 |
38,439 |
39,727 |
|||
Debtors |
17,853 |
19,973 |
28,828 |
23,020 |
23,250 |
23,941 |
24,775 |
|||
Cash |
6,588 |
4,748 |
32,304 |
37,187 |
37,187 |
37,187 |
37,187 |
|||
Other |
4 |
631 |
1,627 |
1,152 |
0 |
0 |
0 |
|||
Current Liabilities |
|
|
(16,388) |
(27,003) |
(35,781) |
(28,905) |
(29,212) |
(21,481) |
(14,883) |
|
Creditors |
(15,834) |
(19,266) |
(16,479) |
(11,784) |
(11,155) |
(11,003) |
(10,822) |
|||
Short term borrowings |
(487) |
(7,680) |
(19,244) |
(16,860) |
(18,057) |
(10,478) |
(4,062) |
|||
Provisions |
(67) |
(57) |
(58) |
(261) |
0 |
0 |
0 |
|||
Long Term Liabilities |
|
|
(17,021) |
(14,281) |
(6,858) |
(13,876) |
(19,336) |
(15,346) |
(11,938) |
|
Long term borrowings |
(7,755) |
(7,293) |
(3,001) |
(4,369) |
(9,029) |
(5,239) |
(2,031) |
|||
Other long term liabilities |
(9,266) |
(6,988) |
(3,857) |
(9,507) |
(10,307) |
(10,107) |
(9,907) |
|||
Net Assets |
|
|
37,187 |
46,478 |
81,625 |
87,107 |
93,542 |
102,056 |
111,039 |
|
CASH FLOW |
||||||||||
Operating Cash Flow |
|
|
10,804 |
4,683 |
3,580 |
20,544 |
15,898 |
16,825 |
17,573 |
|
Net Interest |
(703) |
(913) |
(609) |
(199) |
(200) |
88 |
144 |
|||
Tax |
(2,022) |
(2,822) |
(2,978) |
(2,208) |
(3,577) |
(3,836) |
(4,066) |
|||
Capex |
(679) |
(5,111) |
(6,190) |
(10,392) |
(14,725) |
1,706 |
(365) |
|||
Acquisitions/disposals |
(861) |
(1,667) |
8,357 |
855 |
0 |
0 |
0 |
|||
Financing |
280 |
270 |
21,090 |
622 |
0 |
0 |
0 |
|||
Dividends |
(2,095) |
(3,025) |
(2,876) |
(3,080) |
(3,253) |
(3,415) |
(3,662) |
|||
Net Cash Flow |
4,724 |
(8,585) |
20,374 |
6,142 |
(5,856) |
11,369 |
9,624 |
|||
Opening net debt/(cash) |
|
|
6,155 |
1,654 |
10,225 |
(10,059) |
(15,958) |
(10,101) |
(21,470) |
|
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
|||
Other |
(223) |
14 |
(90) |
(243) |
(1) |
0 |
(0) |
|||
Closing net debt/(cash) |
|
|
1,654 |
10,225 |
(10,059) |
(15,958) |
(10,101) |
(21,470) |
(31,094) |
|
Source: Company data, Edison Research
|
|
Research: Healthcare
AFT Pharmaceuticals is a New Zealand-based specialty pharmaceutical company that currently sells over 130 prescription specialty generics and OTC products through its own salesforce in New Zealand, Australia and South-East Asia. The company recently reported its H120 results. Operating revenue grew by a strong 22.1% year-on-year as there was growth across all regional segments, notably South-East Asia and Rest of World, which grew by 111.9% and 64.4%, respectively. Importantly, the company reported an operating profit of NZ$13.7m (with all regions contributing profit), up from a loss of NZ$0.1m in the first half of FY19.