Treatt — Holding steady

Treatt (LSE: TET)

Currency in GBP

Last close As at 03/02/2023

GBP6.31

15.00 (2.44%)

Market capitalisation

GBP371m

Treatt — Holding steady

Treatt’s FY22 trading update was in line with the reduced guidance issued on 15 August, ie adjusted PBT of £15–15.3m. Revenue growth of 13% is in line with market expectations and the dividend policy remains unchanged. Revenue growth spanned all categories with the exception of tea, as per the August statement. Health and Wellness and Synthetic Aroma witnessed particularly strong growth. The over-hedging, which was highlighted in August and caused part of the downgrade to profits, has now been corrected. While the economic environment remains uncertain, management is encouraged by prevailing consumer trends, particularly in beverages, and is hence confident that the business can revert to its trajectory of growth. Our forecasts are unchanged, with the exception of net debt, and our fair value remains 630p.

Sara Welford

Written by

Sara Welford

Director, Consumer

Treatt

Holding steady

FY22 trading update

Food and beverages

14 October 2022

Price

576p

Market cap

£312m

Net debt (£m) at 30 September 2022

23

Shares in issue

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(9.5)

(23.5)

(45.2)

Rel (local)

(1.7)

(19.3)

(40.2)

52-week high/low

1,315p

507p

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

FY22 results

29 November 2022

Analysts

Sara Welford

+44 (0)20 3077 5700

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 FY22 trading update was in line with the reduced guidance issued on 15 August, ie adjusted PBT of £15–15.3m. Revenue growth of 13% is in line with market expectations and the dividend policy remains unchanged. Revenue growth spanned all categories with the exception of tea, as per the August statement. Health and Wellness and Synthetic Aroma witnessed particularly strong growth. The over-hedging, which was highlighted in August and caused part of the downgrade to profits, has now been corrected. While the economic environment remains uncertain, management is encouraged by prevailing consumer trends, particularly in beverages, and is hence confident that the business can revert to its trajectory of growth. Our forecasts are unchanged, with the exception of net debt, and our fair value remains 630p.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/20

109.0

15.8

21.3

6.0

27.0

1.0%

09/21

124.3

22.7

30.1

7.5

19.1

1.3%

09/22e

138.6

16.3

21.8

7.5

26.4

1.3%

09/23e

146.9

18.0

23.7

8.1

24.3

1.4%

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

Investment phase complete

Treatt has made substantial investments in both its asset base and people over the last few years, which has created a strong position from which it can support future growth. The investment phase is largely complete now, with production almost fully transitioned to the new UK site, and no further expansion required in terms of personnel. As a consequence, management does not expect any significant increase in administrative costs (beyond inflation) in the short to medium term. We note net debt at £23m was somewhat higher than our £18m forecast. The difference stems from Treatt’s decision to invest in inventory towards year-end, and it is now holding “prudent levels of inventory to mitigate supply chain risks for customers”, which is sensible in the current volatile economic environment.

Building a more resilient business

The August downgrade came as a surprise for the market and also highlighted some weaknesses in the company’s systems. Management has acted swiftly to address these, with new FX management systems in place and a more robust approach to forecasting. The speed of implementation underscores the sense of urgency felt by the management team and is testament to Treatt’s business agility.

Valuation: Fair value remains at 630p

Treatt trades at 24.3x and 14.8x FY23 P/E and EV/EBITDA, a c 15% and 5% premium to its peers respectively. We value Treatt on a DCF basis using a WACC of 7.7%, a terminal EBIT margin of 20.0% and terminal sales growth of 2.0%. Our fair value remains unchanged at 630p.

Exhibit 1: Financial summary

£000's

2020

2021

2022e

2023e

2024e

2025e

Year-end 30 September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

109,016

124,326

138,623

146,941

155,757

163,545

Cost of Sales

(77,140)

(82,103)

(100,140)

(105,119)

(110,336)

(114,708)

Gross Profit

31,876

42,223

38,484

41,822

45,421

48,837

EBITDA

 

 

17,862

24,877

21,682

23,990

25,839

27,482

Operating profit (before amort. and excepts.)

 

16,053

23,172

16,746

18,966

20,781

22,190

Intangible Amortisation

(75)

(93)

(79)

(67)

(57)

(49)

Share based payments

(886)

(1,733)

(1,184)

(1,457)

(1,613)

(1,749)

Other

0

0

0

0

0

0

Operating Profit

15,092

21,346

15,483

17,441

19,110

20,393

Net Interest

(291)

(427)

(415)

(1,004)

(677)

(413)

Exceptionals

(1,060)

(1,302)

(3,000)

0

0

0

Profit Before Tax (norm)

 

 

15,762

22,745

16,331

17,962

20,104

21,777

Profit Before Tax (FRS 3)

 

 

13,741

19,617

12,068

16,437

18,434

19,980

Profit Before Tax (company)

 

 

14,801

20,919

15,068

16,437

18,434

19,980

Tax

(2,896)

(4,469)

(3,219)

(3,698)

(4,332)

(4,695)

Profit After Tax (norm)

12,762

18,090

13,112

14,264

15,772

17,082

Profit After Tax (FRS 3)

10,845

15,148

8,849

12,739

14,102

15,285

Discontinued operations

0

0

0

0

0

0

Average Number of Shares Outstanding (m)

59.8

60.1

60.1

60.1

60.1

60.1

EPS - normalised (p)

 

 

21.3

30.1

21.8

23.7

26.2

28.4

EPS - adjusted (p)

 

 

19.7

27.1

19.7

21.2

23.5

25.4

EPS - (IFRS) (p)

 

 

18.1

25.2

14.7

21.2

23.5

25.4

Dividend per share (p)

6.0

7.5

7.5

8.1

8.9

9.7

Gross Margin (%)

29.2

34.0

27.8

28.5

29.2

29.9

EBITDA Margin (%)

16.4

20.0

15.6

16.3

16.6

16.8

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

14.7

18.6

12.1

12.9

13.3

13.6

Operating Margin (%)

13.8

17.2

11.2

11.9

12.3

12.5

BALANCE SHEET

Fixed Assets

 

 

54,048

65,811

66,319

69,431

70,653

72,084

Intangible Assets

1,358

2,424

2,345

2,278

2,221

2,172

Tangible Assets

50,159

61,039

63,182

66,362

67,640

69,119

Investments

2,531

2,348

792

792

792

792

Current Assets

 

 

69,472

83,606

100,138

101,302

87,363

97,716

Stocks

36,050

47,263

62,381

61,715

65,107

68,035

Debtors

24,167

26,371

30,497

32,327

34,111

35,653

Cash

7,739

7,260

7,260

7,260

(11,854)

(5,972)

Other

1,516

2,712

0

0

0

0

Current Liabilities

 

 

(15,989)

(30,460)

(38,534)

(35,042)

(19,427)

(19,544)

Creditors

(12,640)

(17,620)

(18,614)

(18,961)

(19,284)

(19,401)

Short term borrowings

(3,203)

(12,697)

(19,777)

(15,939)

0

0

Provisions

(146)

(143)

(143)

(143)

(143)

(143)

Long Term Liabilities

 

 

(16,411)

(11,605)

(19,869)

(17,950)

(9,981)

(9,981)

Long term borrowings

(3,450)

(2,624)

(9,888)

(7,969)

0

0

Other long term liabilities

(12,961)

(8,981)

(9,981)

(9,981)

(9,981)

(9,981)

Net Assets

 

 

91,120

107,352

108,054

117,741

128,608

140,275

CASH FLOW

Operating Cash Flow

 

 

15,677

13,892

1,933

23,173

20,987

23,128

Net Interest

(191)

(270)

(415)

(1,004)

(677)

(413)

Tax

(2,191)

(4,874)

(3,219)

(3,698)

(4,332)

(4,695)

Capex

(23,909)

(13,195)

(7,079)

(8,204)

(6,336)

(6,771)

Acquisitions/disposals

(1,041)

(1,178)

0

0

0

0

Financing

(69)

(212)

0

0

0

0

Dividends

(3,378)

(3,704)

(4,509)

(4,509)

(4,848)

(5,367)

Net Cash Flow

(15,102)

(9,541)

(13,290)

5,757

4,794

5,883

Opening net debt/(cash)

 

 

(15,958)

(427)

9,114

22,404

16,648

11,854

HP finance leases initiated

0

0

0

0

0

0

Other

(429)

(0)

0

0

(0)

0

Closing net debt/(cash)

 

 

(427)

9,114

22,404

16,648

11,854

5,972

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 2022 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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 2022 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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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