Treatt — FY23 profits in line despite headwinds

Treatt (LSE: TET)

Last close As at 17/05/2024

420.00

2.00 (0.48%)

Market capitalisation

257m

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Research: Consumer

Treatt — FY23 profits in line despite headwinds

Treatt’s FY23 trading update demonstrated a resilient performance despite the tougher trading environment towards the end of the year. Revenue growth of c 5% (to c £147m) has been driven by price increases, which have mitigated inflationary pressures and supported margins. Sales in H223 slowed due to destocking as clients reduced inventories, although management notes early signs that this is reversing. New markets (Coffee, China and Treattzest citrus) displayed particularly strong growth, with revenue up 60% to £16m. Cash generation was at a record high leading to net debt more than halving in a year to £10.5m (FY22: £22.4m).

Russell Pointon

Written by

Russell Pointon

Director of Content, Consumer and Media

Treatt_resized

Consumer

Treatt

FY23 profits in line despite headwinds

FY23 trading update

Food and beverages

16 October 2023

Price

451.50p

Market cap

£273m

Net debt (£m) at 30 September 2023

10.5

Shares in issue

60.5m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.6)

(23.9)

(20.8)

Rel (local)

(10.5)

(24.5)

(27.8)

52-week high/low

724.0p

423.5p

Business description

Treatt provides innovative ingredient solutions from its manufacturing bases in Europe and North America, principally for the flavours and fragrance industries and multinational consumer goods companies, with particular emphasis on the beverage sector.

Next events

FY23 results

28 November 2023

Analysts

Russell Pointon

+44 (0)20 3077 5700

Milo Bussell

+44 (0)20 3077 5700

Treatt is a research client of Edison Investment Research Limited

Treatt’s FY23 trading update demonstrated a resilient performance despite the tougher trading environment towards the end of the year. Revenue growth of c 5% (to c £147m) has been driven by price increases, which have mitigated inflationary pressures and supported margins. Sales in H223 slowed due to destocking as clients reduced inventories, although management notes early signs that this is reversing. New markets (Coffee, China and Treattzest citrus) displayed particularly strong growth, with revenue up 60% to £16m. Cash generation was at a record high leading to net debt more than halving in a year to £10.5m (FY22: £22.4m).

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/21

124.3

22.7

30.1

7.5

15.0

1.7

09/22

140.2

16.5

21.9

7.9

20.6

1.7

09/23e

147.2

18.0

23.5

8.0

19.2

1.8

09/24e

156.0

20.4

26.3

8.6

17.2

1.9

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Lower than expected revenue but profit in line

Treatt expects to report revenue of c £147m in FY23, up 5% y-o-y but below our previous expectations of £154m, due to the destocking from clients in H223 as they focused on managing working capital. Management has successfully mitigated lower volumes and raw material inflation through a combination of price increases and strict cost controls, resulting in an 11% y-o-y increase in PBT pre-exceptional items to c £17m. Cost controls are evidenced by the year-on-year reduction in headcount of c 14%. Prior issues around foreign currency exposures have been successfully managed, with a minimal foreign exchange impact in FY23 as hedging contracts were wound up in early FY23. Management expects capex to normalise as the transition to the new site is complete.

Double-digit profit growth forecast in FY24–25

We have tweaked our FY23 estimates to reflect management’s expectations in the trading update, forecasting revenue of £147m and adjusted PBT of £17m. For FY24 and FY25, we forecast revenue growth of 5–6% with a greater adjusted PBT growth rate of 10–13% as we anticipate an improvement in gross margin and lower administration costs. With the normalisation of capex and strong cash generation, we expect a reduction in the net debt figure from £10.5m in FY23 to £5.4m in FY24, returning to net cash in FY25 of £0.6m.

Valuation: Now at a discount to peers

Treatt’s share price has been weak so far in 2023, down 28% in the year to date, although it has rallied in recent months. As such, Treatt currently trades at 19.2x FY23e P/E and 12.5x FY23e EV/EBITDA. The valuation gap to its peers has switched from a c 5–10% premium at the time of our last note to a notable discount across both multiples of c 10%.

Exhibit 1: Financial summary

£000's

2020

2021

2022

2023e

2024e

2025e

Year end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

109,016

124,326

140,185

147,194

156,026

163,827

Cost of Sales

(77,140)

(82,103)

(101,101)

(104,831)

(110,185)

(114,875)

Gross Profit

31,876

42,223

39,084

42,363

45,841

48,952

EBITDA

 

 

17,862

24,877

19,503

23,580

27,853

30,253

EBITDA (company)

 

 

16,976

23,144

18,464

22,713

26,717

29,007

Operating profit (before amort. and excepts.)

 

16,053

23,172

17,027

19,009

21,421

23,333

Intangible Amortisation

(75)

(93)

(215)

(183)

(155)

(132)

Share based payments

(886)

(1,733)

(1,039)

(866)

(1,136)

(1,246)

Other

0

0

0

0

0

0

Operating Profit

15,092

21,346

15,773

17,960

20,130

21,955

Net Interest

(291)

(427)

(517)

(1,004)

(1,042)

(1,016)

Exceptionals

(1,060)

(1,302)

923

(2,000)

0

0

Profit Before Tax (norm)

 

 

15,762

22,745

16,510

18,005

20,379

22,317

Profit Before Tax (FRS 3)

 

 

13,741

19,617

16,179

14,956

19,088

20,939

Profit Before Tax (company)

 

 

14,801

20,919

15,256

16,956

19,088

20,939

Tax

(2,896)

(4,469)

(2,864)

(3,815)

(4,486)

(4,921)

Profit After Tax (norm)

12,762

18,090

13,215

14,190

15,893

17,396

Profit After Tax (FRS 3)

10,845

15,148

13,315

11,141

14,602

16,018

Average Number of Shares Outstanding (m)

59.8

60.1

60.3

60.5

60.5

60.5

EPS - normalised (p)

 

 

21.3

30.1

21.9

23.5

26.3

28.8

EPS - adjusted (p)

 

 

19.7

27.1

25.4

21.7

24.1

26.5

EPS - (IFRS) (p)

 

 

18.1

25.2

22.1

18.4

24.1

26.5

Dividend per share (p)

6.0

7.5

7.9

8.0

8.6

9.0

Gross Margin (%)

29.2

34.0

27.9

28.8

29.4

29.9

EBITDA Margin (%)

16.4

20.0

13.9

16.0

17.9

18.5

Operating Margin (before GW and except.) (%)

14.7

18.6

12.1

12.9

13.7

14.2

Operating Margin (%)

13.8

17.2

11.3

12.2

12.9

13.4

BALANCE SHEET

Fixed Assets

 

 

54,048

65,811

79,644

81,677

81,430

81,155

Intangible Assets

1,358

2,424

3,206

3,023

2,868

2,736

Tangible Assets

50,159

61,039

74,281

78,654

78,563

78,420

Investments

2,531

2,348

2,157

0

0

0

Current Assets

 

 

69,472

83,606

108,537

94,498

101,274

108,350

Stocks

36,050

47,263

68,351

59,761

65,063

70,937

Debtors

24,167

26,371

37,113

32,383

33,858

35,059

Cash

7,739

7,260

2,354

2,354

2,354

2,354

Other

1,516

2,712

719

0

0

0

Current Liabilities

 

 

(15,989)

(30,460)

(46,224)

(28,266)

(25,620)

(22,308)

Creditors

(12,640)

(17,620)

(23,792)

(19,288)

(20,080)

(20,712)

Short term borrowings

(3,203)

(12,697)

(22,035)

(8,581)

(5,143)

(1,199)

Provisions

(146)

(143)

(397)

(397)

(397)

(397)

Long Term Liabilities

 

 

(16,411)

(11,605)

(7,711)

(10,660)

(8,941)

(6,969)

Long term borrowings

(3,450)

(2,624)

(2,342)

(4,291)

(2,572)

(600)

Other long term liabilities

(12,961)

(8,981)

(5,369)

(6,369)

(6,369)

(6,369)

Net Assets

 

 

91,120

107,352

134,246

137,249

148,144

160,228

CASH FLOW

Operating Cash Flow

 

 

15,677

13,442

(1,830)

30,397

21,868

23,809

Net Interest

(191)

(270)

(382)

(1,004)

(1,042)

(1,016)

Tax

(2,191)

(4,874)

443

(3,815)

(4,486)

(4,921)

Capex

(23,909)

(13,195)

(11,849)

(8,944)

(6,340)

(6,777)

Acquisitions/disposals

(1,041)

(1,178)

4,672

0

0

0

Financing

(69)

238

475

0

0

0

Dividends

(3,378)

(3,704)

(4,834)

(4,731)

(4,843)

(5,180)

Net Cash Flow

(15,102)

(9,541)

(13,305)

11,902

5,157

5,916

Opening net debt/(cash)

 

 

(15,958)

(427)

9,114

22,419

10,518

5,361

HP finance leases initiated

0

0

0

0

0

0

Other

(429)

(0)

0

0

0

0

Closing net debt/(cash)

 

 

(427)

9,114

22,419

10,517

5,361

(555)

Source: Company accounts, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Treatt and prepared and issued by Edison, in consideration of a fee payable by Treatt. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Treatt and prepared and issued by Edison, in consideration of a fee payable by Treatt. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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