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Research: Consumer
Treatt has posted yet another year of excellent growth, with revenues up 25% and adjusted PBT up c 45%. The company has reached its FY20 financial objectives three years early, and the management has therefore updated its strategy to take the company through to the next phase. A new facility is being built in the UK, and the US site is being expanded. Both projects are on track and Treatt has now announced a share placing to fund these projects. This was always flagged as a possibility. We update our forecasts to reflect the FY17 results and the share placement. Our fair value is 515p (from 522p previously).
Written by
Treatt |
Growth continues apace |
FY17 results & |
Food & beverages |
30 November 2017 |
Share price performance
Business description
Next events
Analysts
Treatt is a research client of Edison Investment Research Limited |
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Treatt has posted yet another year of excellent growth, with revenues up 25% and adjusted PBT up c 45%. The company has reached its FY20 financial objectives three years early, and the management has therefore updated its strategy to take the company through to the next phase. A new facility is being built in the UK, and the US site is being expanded. Both projects are on track and Treatt has now announced a share placing to fund these projects. This was always flagged as a possibility. We update our forecasts to reflect the FY17 results and the share placement. Our fair value is 515p (from 522p previously).
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/16 |
88.0 |
9.6 |
14.3 |
4.4 |
33.6 |
0.9 |
09/17 |
109.6 |
14.0 |
20.4 |
4.8 |
23.5 |
1.0 |
09/18e |
117.3 |
14.4 |
19.2 |
4.6 |
25.0 |
1.0 |
09/19e |
123.2 |
15.5 |
20.7 |
4.9 |
23.2 |
1.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
FY17 was a record year
FY17 was a record year for the company, with revenues topping £100m for the first time (£109.6m), adjusted PBT of £12.9m and EPS of 18.3p on a company adjusted basis. The growth rate achieved in FY17 will be hard to replicate and should not be considered the new norm, but it does demonstrate the company is successfully embracing the sweet spot in flavour ingredients. We note management’s comments that FY18 has started well, and the growth in FY17 was broad-based – both in terms of geography and product mix – which sets a good base for the future.
New strategy builds on previous foundations
Treatt’s new strategy is an evolution of the previous one. The focus remains on the company’s core areas of citrus, tea and sugar reduction. The theme of deep customer relationships continues: this has served the company well and should further help to speed up the innovation and success rate with its customers. The management is also focused on enhancing the company’s technical abilities to drive the business forward through product innovation and operational efficiencies, which in turn should drive margin expansion. The UK relocation and US expansion will help achieve these objectives.
Valuation: Fair value is 515p
We value Treatt using a DCF model, which now indicates a fair value of 515p (previously 522p), an attractive c 7% upside to the current share price. We have incorporated the share placement into our forecasts, hence reducing our net debt and increasing the number of shares. We have assumed net proceeds of c £22m. Treatt trades at 24.6x and 14.8x calendar P/E and EV/EBITDA multiples for 2018, representing discounts of c 15% and 20% to its ingredients peer group, respectively. Given the current growth trajectory of the business, and our forecast for low double-digit CAGR EPS for 2016-20, we believe this level of discount is unwarranted.
Forecast revisions
FY17 results were broadly in line with our expectations. Following our upgrades in October with the pre-close trading update, our sales forecast was £108.7m and FY revenues came in slightly higher at £109.6m. Adjusted PBT was £12.9m, or an impressive c 45% growth vs FY16. Adjusted EPS was up c 40% to 18.3p. We illustrate the slight changes to our P&L forecasts in Exhibit 1 below. We have incorporated the share placement into our forecasts and have therefore made some changes to our net debt assumptions. We have assumed a placement equivalent to 10% of the share capital, placed at 410p, to give net proceeds of c £22m. We illustrate these in Exhibit 2 and these affect our PBT and EPS forecasts through lower interest charges and a higher number of shares.
Exhibit 1: Old vs new key P&L forecasts
EPS (p)* |
PBT (£000s)* |
Revenue (£000s) |
|||||||
Old |
New |
% change |
Old |
New |
% change |
Old |
New |
% change |
|
2018e |
19.3 |
17.3 |
-10.1% |
13,479 |
13,352 |
-0.9% |
116,340 |
117,301 |
0.8% |
2019e |
19.2 |
18.7 |
-2.8% |
13,429 |
14,380 |
7.1% |
122,157 |
123,166 |
0.8% |
Source: Edison Investment Research. Note: *Stated on IFRS basis.
Exhibit 2: Old vs new net (debt)/cash forecasts, £000s
Old |
New |
% change |
|
2018e |
(26,984) |
(2,728) |
-89.9% |
2019e |
(38,642) |
(15,531) |
-59.8% |
Source: Edison Investment Research
Valuation update
We illustrate Treatt’s valuation versus its ingredients peer group in Exhibit 3 below. Treatt trades at a significant discount to its peer group on all metrics. Some discount can be applied 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. However, we believe a 15-25% discount on EV/EBITDA and P/E is unwarranted.
Exhibit 3: Benchmark valuation
Market cap (m) |
P/E (x) |
EV/EBITDA (x) |
Dividend yield (%) |
|||||
2018e |
2019e |
2018e |
2019e |
2018e |
2019e |
|||
Givaudan |
CHF 20,665 |
28.2 |
26.4 |
19.5 |
18.1 |
2.6% |
2.8% |
|
IFF |
$12,207 |
26.7 |
24.6 |
17.5 |
16.1 |
1.7% |
1.9% |
|
Symrise |
CHF 10,690 |
31.2 |
28.5 |
16.5 |
15.2 |
1.3% |
1.4% |
|
Frutarom |
ILS 18,312 |
33.8 |
28.3 |
22.0 |
18.9 |
0.3% |
0.4% |
|
Chr Hansen |
DKK 73,969 |
40.7 |
35.8 |
26.4 |
23.4 |
1.6% |
1.8% |
|
Kerry |
€ 15,502 |
25.9 |
23.8 |
18.6 |
16.8 |
0.7% |
0.8% |
|
Ingredion |
$10,043 |
18.1 |
16.8 |
10.3 |
9.6 |
1.5% |
1.7% |
|
Peer group average |
29.2 |
26.3 |
18.7 |
16.9 |
1.2% |
1.3% |
||
Treatt |
£247.4 |
24.6 |
22.9 |
14.8 |
12.7 |
1.0% |
1.0% |
|
Premium/(discount) to peer group (%) |
-15.9% |
-13.1% |
-20.6% |
-25.0% |
-18.1% |
-22.2% |
||
Source: Bloomberg (prices as of 30 November 2017). Note: Treatt figures are calendarised to aid comparison.
Our DCF-derived fair value is now 515p (previously 522p) following the changes to our model detailed in our forecast review section above. Our longer-term sales growth forecast is 5% pa, falling to 2% growth in perpetuity. Our DCF is calculated based on a WACC of 7.3% (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 4: Financial summary
£000s |
2015 |
2016 |
2017 |
2018e |
2019e |
2020e |
||
Year end September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
85,934 |
88,040 |
109,627 |
117,301 |
123,166 |
128,093 |
Cost of Sales |
(66,955) |
(67,639) |
(82,819) |
(88,258) |
(92,055) |
(95,609) |
||
Gross Profit |
18,979 |
20,401 |
26,808 |
29,043 |
31,111 |
32,483 |
||
EBITDA |
|
|
10,307 |
11,604 |
16,307 |
17,317 |
20,539 |
22,680 |
Operating Profit (before amort., except and sbp) |
|
|
9,063 |
10,257 |
14,908 |
15,362 |
16,886 |
17,840 |
Intangible Amortisation |
(175) |
(142) |
(137) |
(160) |
(160) |
(160) |
||
Share-based payments |
(198) |
(566) |
(966) |
(915) |
(986) |
(1,053) |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
8,690 |
9,549 |
13,805 |
14,287 |
15,741 |
16,626 |
||
Net Interest |
(740) |
(703) |
(913) |
(936) |
(1,361) |
(1,260) |
||
Exceptionals |
(174) |
(553) |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
8,323 |
9,554 |
13,995 |
14,427 |
15,525 |
16,580 |
Profit Before Tax (FRS 3) |
|
|
7,776 |
8,293 |
12,892 |
13,352 |
14,380 |
15,366 |
Profit Before Tax (company) |
|
|
7,950 |
8,846 |
12,892 |
13,352 |
14,380 |
15,366 |
Tax |
(1,786) |
(2,144) |
(3,347) |
(3,405) |
(3,667) |
(3,918) |
||
Profit After Tax (norm) |
6,537 |
7,410 |
10,648 |
11,022 |
11,858 |
12,661 |
||
Profit After Tax (FRS 3) |
5,990 |
6,149 |
9,545 |
9,947 |
10,713 |
11,448 |
||
Average Number of Shares Outstanding (m) |
51.5 |
51.9 |
52.2 |
57.4 |
57.4 |
57.4 |
||
EPS - normalised (p) |
|
|
12.7 |
14.3 |
20.4 |
19.2 |
20.7 |
22.1 |
EPS - normalised & fully diluted (p) |
|
|
12.6 |
14.1 |
19.8 |
18.7 |
20.1 |
21.4 |
EPS - (IFRS) (p) |
|
|
11.6 |
11.8 |
18.3 |
17.3 |
18.7 |
19.9 |
Dividend per share (p) |
4.0 |
4.4 |
4.8 |
4.6 |
4.9 |
5.2 |
||
Gross Margin (%) |
22.1 |
23.2 |
24.5 |
24.8 |
25.3 |
25.4 |
||
EBITDA Margin (%) |
12.0 |
13.2 |
14.9 |
14.8 |
16.7 |
17.7 |
||
Operating Margin (before GW and except.) (%) |
10.5 |
11.7 |
13.6 |
13.1 |
13.7 |
13.9 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
13,381 |
16,161 |
19,532 |
43,176 |
63,211 |
62,132 |
Intangible Assets |
1,736 |
3,364 |
3,331 |
3,171 |
3,011 |
2,851 |
||
Tangible Assets |
10,998 |
11,361 |
14,821 |
38,625 |
58,820 |
57,901 |
||
Investments |
647 |
1,436 |
1,380 |
1,380 |
1,380 |
1,380 |
||
Current Assets |
|
|
45,045 |
54,435 |
68,230 |
71,295 |
74,129 |
76,392 |
Stocks |
25,799 |
29,990 |
42,878 |
45,410 |
47,434 |
49,076 |
||
Debtors |
17,635 |
17,853 |
19,973 |
21,137 |
21,947 |
22,569 |
||
Cash |
1,477 |
6,588 |
4,748 |
4,748 |
4,748 |
4,748 |
||
Other |
134 |
4 |
631 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(13,481) |
(16,388) |
(27,003) |
(28,722) |
(38,444) |
(33,244) |
Creditors |
(12,675) |
(15,834) |
(19,266) |
(23,737) |
(24,924) |
(25,921) |
||
Short term borrowings |
(567) |
(487) |
(7,680) |
(4,984) |
(13,519) |
(7,323) |
||
Provisions |
(239) |
(67) |
(57) |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(11,760) |
(17,021) |
(14,281) |
(9,877) |
(13,945) |
(10,646) |
Long term borrowings |
(7,065) |
(7,755) |
(7,293) |
(2,492) |
(6,760) |
(3,661) |
||
Other long term liabilities |
(4,695) |
(9,266) |
(6,988) |
(7,385) |
(7,185) |
(6,985) |
||
Net Assets |
|
|
33,185 |
37,187 |
46,478 |
75,872 |
84,952 |
94,634 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
8,667 |
10,804 |
4,683 |
19,343 |
18,691 |
21,215 |
Net Interest |
(740) |
(703) |
(913) |
(936) |
(1,361) |
(1,260) |
||
Tax |
(1,469) |
(2,022) |
(2,822) |
(3,405) |
(3,667) |
(3,918) |
||
Capex |
(924) |
(679) |
(5,111) |
(25,760) |
(23,847) |
(3,921) |
||
Acquisitions/disposals |
(103) |
(861) |
(1,667) |
0 |
0 |
0 |
||
Financing |
147 |
280 |
270 |
20,759 |
0 |
0 |
||
Dividends |
(1,978) |
(2,095) |
(3,025) |
(2,506) |
(2,618) |
(2,820) |
||
Net Cash Flow |
3,600 |
4,724 |
(8,585) |
7,497 |
(12,803) |
9,295 |
||
Opening net debt/(cash) |
|
|
9,584 |
6,155 |
1,654 |
10,225 |
2,728 |
15,531 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
(171) |
(223) |
14 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
6,155 |
1,654 |
10,225 |
2,728 |
15,531 |
6,236 |
Source: Edison Investment Research, Treatt accounts
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