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GBP377m
Research: Consumer
Treatt has once again posted a strong performance in FY21, delivering its ninth consecutive year of increased adjusted PBT. Healthier living remains an important driver of revenue and margin expansion, with group gross margins up an impressive 480bp during the year. Investment in the business continues, with the installation and commissioning of machinery at the new UK site expected by mid-2022, and the transfer of manufacturing equipment from the old facility to be completed by mid-2023. The total dividend per share was up 25% year-on-year to 7.5p.
Treatt |
Looking ahead to a new level |
FY21 results |
Food & beverages |
30 November 2021 |
Share price performance
Business description
Next events
Analysts
Treatt is a research client of Edison Investment Research Limited |
Treatt has once again posted a strong performance in FY21, delivering its ninth consecutive year of increased adjusted PBT. Healthier living remains an important driver of revenue and margin expansion, with group gross margins up an impressive 480bp during the year. Investment in the business continues, with the installation and commissioning of machinery at the new UK site expected by mid-2022, and the transfer of manufacturing equipment from the old facility to be completed by mid-2023. The total dividend per share was up 25% year-on-year to 7.5p.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/20 |
109.0 |
15.8 |
21.3 |
6.0 |
53.9 |
0.5 |
09/21 |
124.3 |
22.7 |
30.1 |
7.5 |
38.2 |
0.7 |
09/22e |
131.8 |
24.1 |
32.2 |
8.0 |
35.7 |
0.7 |
09/23e |
139.7 |
26.0 |
34.3 |
8.5 |
33.5 |
0.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
In the sweet spot
Treatt remains in the sweet spot as its portfolio is well-suited for the consumer trends of clean labels and more natural, better-for-you products. The return of the on-trade following the lifting of COVID-19 restrictions, coupled with an increase in new launches that were postponed from the height of the pandemic, has resulted in further growth, particularly in the tea category, which was up 113% in revenue terms. Its synthetic aroma business also grew as demand for sustainable synthetic products is increasing. FY21 revenues were £124.3m, 14% ahead of the prior year, and adjusted PBT was £20.9m on a company-normalised basis, up 41% on FY20.
Looking ahead with confidence
Treatt’s focus on value-added products continues to be a driver of margin expansion as the group moves away from commodity products. In terms of costs, increases in freight and logistics costs have not materially affected the group as it tends to transport concentrated product, hence logistics costs are less significant. Nevertheless, management has prudently built inventory to prevent any potential stresses in the supply chain. The significant increase in inventory, coupled with planned capital investment behind the new UK site, has resulted in a net cash outflow and the company moving to a net debt position of £9.1m at year end. We expect the business to be back in net cash by end FY22.
Valuation: Trading at a premium to peers
We note that the current share price is discounting medium-term sales growth of 4.5%, falling to 2.5% in perpetuity, with a WACC of 5.7% and a terminal EBIT margin of 20.0% (vs 17.2% in FY21). Our earnings estimates remain broadly unchanged following the announcement. Treatt trades at 35.7x FY22e P/E and 23.8x FY22e EV/EBITDA. On both P/E and EV/EBITDA multiples, it trades at a c 15–20% premium to its peer group, though it trades in line with peers if we exclude those that are more exposed to lower-margin commoditised products.
FY21 results
Treatt’s FY21 revenues of £124.3m were in line with our expectations and the recent trading update. Company-adjusted PBT was £20.9m, ahead of our £20.4m estimate. Adjusted EPS (as defined by Treatt) were up 37% to 27.1p, a touch below our 27.3p forecast. Cash flow was weaker during FY21 as heavy capital investment continued into the new UK site as planned, and there was an £11.2m build-up of inventory. This was driven by three factors: growth of the business and strength of the order book; higher prices of orange oil; and proactive purchasing by the Treatt procurement team to protect customers and the business from the well-documented global supply chain issues. This resulted in an FY21 year-end net debt position of £9.1m (versus net cash of £0.4m at end FY20).
Treatt performed well across all its segments during FY21, with growth primarily driven by the healthier living categories. Tea revenue was up an impressive 113%, although part of this was due to demand last year being affected by pandemic-related closures, particularly in the hospitality space. The Health & Wellness segment was up 29% in revenue terms and built on prior strength, while the Fruit & Vegetables segment had one of its best years and grew revenues by 60%. The Herbs, Spices & Florals business grew by just 0.5%, with the slowdown ascribed to lower on-trade consumption. Citrus remains the largest product category, although revenues were down 1.2% owing to timing of deliveries and contract mix with some large customers. The legacy Aroma & HICs business was up 8.9%; while Treatt continues to shift its focus away from traded commodities and towards value-added solutions, the demand for sustainable synthetic products continues to increase.
Exhibit 1: Actual versus forecast key P&L metrics
FY21 |
|||
Estimate |
Actual |
Difference |
|
Revenue (£000s) |
124,278 |
124,326 |
0.0% |
Operating profit (£000s)* |
20,436 |
21,346 |
4.5% |
PBT (pre-exceptional) Treatt (£000s)* |
20,417 |
20,919 |
2.5% |
PBT (pre-exceptional) Edison (£000s) |
21,701 |
22,745 |
4.8% |
Basic EPS (pre-exceptional) Treatt (p)* |
27.3 |
27.1 |
-0.9% |
Basic EPS (pre-exceptional) Edison (p) |
29.4 |
30.1 |
2.2% |
Source: Edison Investment Research. Note: *Stated on company normalised basis, which is pre-exceptional but after amortisation of acquired intangibles and share-based payments.
We have updated our forecasts in light of the FY21 results and illustrate the key changes in Exhibit 2 below.
Exhibit 2: Old versus new key P&L forecasts
FY22e |
FY23e |
|||||
Old |
New |
Diff |
Old |
New |
Diff |
|
Revenue (£000s) |
131,735 |
131,786 |
0.0% |
139,639 |
139,693 |
0.0% |
Operating profit (£000s)* |
22,057 |
22,034 |
-0.1% |
23,800 |
23,775 |
-0.1% |
PBT (pre-exceptional) Treatt (£000s)* |
22,051 |
22,016 |
-0.2% |
23,848 |
23,815 |
-0.1% |
PBT (pre-exceptional) Edison (£000s) |
23,546 |
24,076 |
2.3% |
25,453 |
25,994 |
2.1% |
Basic EPS (pre-exceptional) Treatt (p)* |
29.5 |
28.8 |
-2.3% |
31.9 |
30.7 |
-3.7% |
Basic EPS (pre-exceptional) Edison (p) |
32.0 |
32.2 |
0.8% |
34.6 |
34.3 |
-0.7% |
Source: Edison Investment Research. Note: *Stated on company normalised basis, which is pre-exceptional but after amortisation of acquired intangibles and share-based payments.
Valuation
We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 3 below. For 2022, Treatt trades at a c 15–20% premium to its peer group on both a P/E and EV/EBITDA basis, though we note Kerry and Ingredion have a larger proportion of lower margin products in their portfolios. If we exclude Kerry and Ingredion, Treatt is trading broadly in line with the remaining peers on both P/E and EV/EBITDA. Although it is smaller than its peers, its portfolio of products is increasingly specialised and the company has demonstrated its resilience with a robust performance despite the COVID-19 pandemic.
Exhibit 3: Comparative valuation
Market cap |
P/E (x) |
EV/EBITDA (x) |
Dividend yield (%) |
|||||
2021e |
2022e |
2021e |
2022e |
2021e |
2022e |
|||
Givaudan |
CHF 41,764 |
44.7 |
41.4 |
30.1 |
28.8 |
1.5 |
1.6 |
|
IFF |
$36,800 |
25.7 |
23.2 |
19.6 |
17.2 |
2.0 |
2.2 |
|
Symrise |
CHF 17,349 |
44.4 |
41.6 |
23.3 |
22.1 |
0.9 |
0.9 |
|
Chr Hansen |
DKK 65,905 |
42.2 |
38.4 |
25.0 |
23.0 |
2.0 |
1.7 |
|
Kerry |
€ 18,982 |
28.6 |
26.0 |
19.6 |
18.4 |
0.9 |
0.9 |
|
Ingredion |
$6,428 |
14.0 |
13.1 |
8.7 |
8.2 |
3.0 |
2.7 |
|
Peer group average |
33.3 |
30.6 |
21.1 |
19.6 |
1.7 |
1.7 |
||
Treatt |
£691.4 |
38.2 |
35.7 |
27.8 |
23.8 |
0.7 |
0.7 |
|
Premium/(discount) to peer group (%) |
14.9% |
16.5% |
31.8% |
21.4% |
(61.9%) |
(58.4%) |
Source: Refinitiv, Edison Investment Research. Note: Prices as of 26 November 2021.
Exhibit 4: Financial summary
£000's |
2018 |
2019 |
2020 |
2021 |
2022e |
2023e |
2024e |
||
Year end September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||||
Revenue |
|
|
112,163 |
112,717 |
109,016 |
124,326 |
131,786 |
139,693 |
148,074 |
Cost of Sales |
(84,407) |
(84,060) |
(77,140) |
(82,103) |
(86,897) |
(91,692) |
(96,749) |
||
Gross Profit |
27,756 |
28,657 |
31,876 |
42,223 |
44,888 |
48,001 |
51,325 |
||
EBITDA |
|
|
16,627 |
15,785 |
17,862 |
24,877 |
29,007 |
30,951 |
32,984 |
Operating Profit (before amort., except and sbp.) |
|
|
15,108 |
14,226 |
16,053 |
23,172 |
24,093 |
25,954 |
27,955 |
Intangible Amortisation |
(124) |
(90) |
(75) |
(93) |
(79) |
(67) |
(57) |
||
Share based payments |
(1,040) |
(637) |
(886) |
(1,733) |
(1,981) |
(2,112) |
(2,253) |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
13,944 |
13,499 |
15,092 |
21,346 |
22,034 |
23,775 |
25,646 |
||
Net Interest |
(1,302) |
(199) |
(291) |
(427) |
(18) |
40 |
92 |
||
Exceptionals |
(1,105) |
(755) |
(1,060) |
(1,302) |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
13,806 |
14,027 |
15,762 |
22,745 |
24,076 |
25,994 |
28,047 |
Profit Before Tax (FRS 3) |
|
|
11,537 |
12,545 |
13,741 |
19,617 |
22,016 |
23,815 |
25,738 |
Profit Before Tax (company) |
|
|
12,642 |
13,300 |
14,801 |
20,919 |
22,016 |
23,815 |
25,738 |
Tax |
(2,284) |
(2,673) |
(2,896) |
(4,469) |
(4,703) |
(5,358) |
(6,048) |
||
Profit After Tax (norm) |
11,392 |
11,263 |
12,762 |
18,090 |
19,372 |
20,635 |
21,999 |
||
Profit After Tax (FRS 3) |
9,253 |
9,872 |
10,845 |
15,148 |
17,313 |
18,457 |
19,689 |
||
Discontinued operations |
2,976 |
(1,084) |
0 |
0 |
0 |
0 |
0 |
||
Average Number of Shares Outstanding (m) |
56.8 |
59.1 |
59.8 |
60.1 |
60.1 |
60.1 |
60.1 |
||
EPS - normalised (p) |
|
|
20.1 |
19.0 |
21.3 |
30.1 |
32.2 |
34.3 |
36.6 |
EPS - adjusted (p) |
|
|
18.0 |
17.8 |
19.7 |
27.1 |
28.8 |
30.7 |
32.7 |
EPS - (IFRS) (p) |
|
|
16.3 |
16.7 |
18.1 |
25.2 |
28.8 |
30.7 |
32.7 |
Dividend per share (p) |
5.1 |
5.5 |
6.0 |
7.5 |
8.0 |
8.5 |
9.1 |
||
Gross Margin (%) |
24.7 |
25.4 |
29.2 |
34.0 |
34.1 |
34.4 |
34.7 |
||
EBITDA Margin (%) |
14.8 |
14.0 |
16.4 |
20.0 |
22.0 |
22.2 |
22.3 |
||
Operating Margin (before GW and except.) (%) |
13.5 |
12.6 |
14.7 |
18.6 |
18.3 |
18.6 |
18.9 |
||
Operating Margin (%) |
12.4 |
12.0 |
13.8 |
17.2 |
16.7 |
17.0 |
17.3 |
||
BALANCE SHEET |
|||||||||
Fixed Assets |
|
|
21,863 |
31,730 |
54,048 |
65,811 |
64,740 |
66,770 |
68,905 |
Intangible Assets |
752 |
845 |
1,358 |
2,424 |
2,345 |
2,278 |
2,221 |
||
Tangible Assets |
20,038 |
29,485 |
50,159 |
61,039 |
61,603 |
63,700 |
65,892 |
||
Investments |
1,073 |
1,400 |
2,531 |
2,348 |
792 |
792 |
792 |
||
Current Assets |
|
|
102,401 |
98,158 |
69,472 |
83,606 |
84,917 |
95,951 |
111,125 |
Stocks |
39,642 |
36,799 |
36,050 |
47,263 |
49,835 |
52,546 |
55,403 |
||
Debtors |
28,828 |
23,020 |
24,167 |
26,371 |
27,821 |
29,351 |
30,964 |
||
Cash |
32,304 |
37,187 |
7,739 |
7,260 |
7,260 |
14,054 |
24,759 |
||
Other |
1,627 |
1,152 |
1,516 |
2,712 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(35,781) |
(28,905) |
(15,989) |
(30,460) |
(22,794) |
(21,157) |
(21,642) |
Creditors |
(16,479) |
(11,784) |
(12,640) |
(17,620) |
(20,517) |
(21,014) |
(21,499) |
||
Short term borrowings |
(19,244) |
(16,860) |
(3,203) |
(12,697) |
(2,134) |
0 |
0 |
||
Provisions |
(58) |
(261) |
(146) |
(143) |
(143) |
(143) |
(143) |
||
Long Term Liabilities |
|
|
(6,858) |
(13,876) |
(16,411) |
(11,605) |
(11,048) |
(9,981) |
(9,981) |
Long term borrowings |
(3,001) |
(4,369) |
(3,450) |
(2,624) |
(1,067) |
0 |
0 |
||
Other long-term liabilities |
(3,857) |
(9,507) |
(12,961) |
(8,981) |
(9,981) |
(9,981) |
(9,981) |
||
Net Assets |
|
|
81,625 |
87,107 |
91,120 |
107,352 |
115,815 |
131,583 |
148,407 |
CASH FLOW |
|||||||||
Operating Cash Flow |
|
|
3,580 |
20,544 |
15,677 |
13,892 |
27,881 |
27,208 |
29,000 |
Net Interest |
(609) |
(199) |
(191) |
(270) |
(18) |
40 |
92 |
||
Tax |
(2,978) |
(2,208) |
(2,191) |
(4,874) |
(4,703) |
(5,358) |
(6,048) |
||
Capex |
(6,190) |
(10,392) |
(23,909) |
(13,195) |
(5,477) |
(7,095) |
(7,221) |
||
Acquisitions/disposals |
8,357 |
855 |
(1,041) |
(1,178) |
0 |
0 |
0 |
||
Financing |
21,090 |
622 |
(69) |
(212) |
0 |
0 |
0 |
||
Dividends |
(2,876) |
(3,080) |
(3,378) |
(3,704) |
(4,509) |
(4,800) |
(5,117) |
||
Net Cash Flow |
20,374 |
6,142 |
(15,102) |
(9,541) |
13,174 |
9,994 |
10,705 |
||
Opening net debt/(cash) |
|
|
10,225 |
(10,059) |
(15,958) |
(427) |
9,114 |
(4,060) |
(14,054) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
(90) |
(243) |
(429) |
(0) |
0 |
0 |
(0) |
||
Closing net debt/(cash) |
|
|
(10,059) |
(15,958) |
(427) |
9,114 |
(4,060) |
(14,054) |
(24,759) |
Source: Company accounts, Edison Investment Research
|
|
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