Treatt — Positive momentum continues

Treatt (LSE: TET)

Currency in GBP

Last close As at 30/01/2023

GBP6.27

−1.00 (−0.16%)

Market capitalisation

GBP377m

Research: Consumer

Treatt — Positive momentum continues

Treatt has had yet another strong year, with momentum in the business continuing. Revenue growth was 14% during the year, or 18% at constant currency, and was driven by continued strength in the healthier living segments, although slightly below our forecasts. Margins also continued to benefit from the positive mix as Treatt’s products increasingly move towards more value-added solutions. FY21 PBT is still expected to be in line with prior guidance.

Sara Welford

Written by

Sara Welford

Director, Consumer

Consumer

Treatt

Positive momentum continues

FY trading update

Food & beverages

12 October 2021

Price

1,050p

Market cap

£628m

Net debt (£m) at 30 September 2021

6

Shares in issue

59.6m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.5

(7.9)

63.3

Rel (local)

5.2

(7.8)

35.6

52-week high/low

1,225p

600p

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

FY21 results

30 November 2021

Analysts

Sara Welford

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Treatt is a research client of Edison Investment Research Limited

Treatt has had yet another strong year, with momentum in the business continuing. Revenue growth was 14% during the year, or 18% at constant currency, and was driven by continued strength in the healthier living segments, although slightly below our forecasts. Margins also continued to benefit from the positive mix as Treatt’s products increasingly move towards more value-added solutions. FY21 PBT is still expected to be in line with prior guidance.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/19

112.7

14.0

19.0

5.5

55.1

0.5

09/20

109.0

15.8

21.3

6.0

49.2

0.6

09/21e

124.3

21.7

29.4

8.5

35.7

0.8

09/22e

131.7

23.5

32.0

9.2

32.8

0.9

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

Flavours and fragrances continues to be attractive

The flavours and fragrances market continues to be attractive and Treatt successfully embraces the sweet spot. Its portfolio is well suited for the consumer trends of clean labels and more natural, better-for-you products. For example, the consumer shift away from categories such as beer towards products such as craft beers, alcoholic seltzers and cocktails – which all contain natural flavourings – serves as a material driver of growth for the whole flavour industry and for Treatt in particular. 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.

Positive mix still driving margin improvement

Treatt’s continued focus on value-added products continues to be a driver of margin expansion as the group moves away from commodity products. Faster growth in the higher-margin categories was also of help during FY21 and hence management upgraded its PBT outlook with the H121 results. 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. The company reported ending FY21 with net debt of c £6m on a pre-IFRS 16 basis.

Valuation: Dividend uplift expected

We note the current share price is discounting medium-term sales growth of 4.5%, falling to 2.0% in perpetuity, with a WACC of 5.7% and a terminal EBIT margin of 20.0%. We expect a significant uplift in the dividend in FY21 as the company has a very modest net debt position. Our earnings estimates remain broadly unchanged following the announcement. On a calendarised basis, Treatt trades at 32.8x FY22e P/E and 20.9x FY22e EV/EBITDA. On both P/E and EV/EBITDA multiples, it trades at a c 10% premium to its peer group.

Forecast revisions

We update our forecasts to reflect the latest trading. We cut our FY21 revenue estimates to £124m, as per the trading update, but our profit forecasts remain broadly unchanged as higher margins than expected have compensated for the lower growth than expected versus our forecasts. We illustrate the changes in Exhibit 1 below. We also update our net debt forecast to reflect the guidance in the trading statement.

Exhibit 1: Old versus new key P&L forecasts

2021

2022

2023

Old

New

Diff

Old

New

Diff

Old

New

Diff

Revenue (£000)

127,549

124,278

-2.6%

135,202

131,735

-2.6%

143,314

139,639

-2.6%

EBITDA (£000)

10,307

25,478

147.2%

11,604

30,123

159.6%

15,049

32,106

113.3%

Operating profit (£000)

20,464

20,436

-0.1%

22,097

22,057

-0.2%

23,853

23,800

-0.2%

PBT (pre-exceptional) Treatt (£000)*

20,450

20,417

-0.2%

22,099

22,051

-0.2%

23,906

23,848

-0.2%

PBT (pre-exceptional) Edison (£000)

21,736

21,701

-0.2%

23,597

23,546

-0.2%

25,514

25,453

-0.2%

Basic EPS (pre-exceptional) Treatt (p)*

27.3

27.3

-0.2%

29.5

29.5

-0.2%

32.0

31.9

-0.2%

Basic EPS (pre-exceptional) Edison (p)

29.5

29.4

-0.2%

32.0

32.0

-0.2%

34.6

34.6

-0.2%

Net debt/(cash) (£000)

5,945.4

6,022.6

1.3%

(5,384.6)

(5,264.2)

-2.2%

(16,137.6)

(15,969.3)

-1.0%

Source: Edison Investment Research. Note: *Stated on company normalised basis, which is pre-exceptional but after amortisation of acquired intangibles and share-based payments.

The outlook for FY22 is positive and the board expects to see growth across all its product categories.

Valuation

We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 2 below. For 2022, Treatt trades at a c 10% premium to its peer group on both a P/E and EV/EBITDA basis. 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 2: Comparative valuation

Market cap (m)

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

2021e

2022e

2021e

2022e

2021e

2022e

Givaudan

CHF39,277

42.0

39.0

28.8

27.6

1.6

1.7

IFF

$35,135

24.2

21.5

18.6

15.9

2.1

2.3

Symrise

CHF15,715

39.9

37.0

21.3

20.0

1.0

1.0

Chr Hansen

DKK67,088

42.6

36.7

25.3

22.9

2.0

1.6

Kerry

€20,545

30.5

27.7

20.8

19.6

0.8

0.9

Ingredion

$6,364

14.3

13.3

8.7

8.2

2.8

2.8

Peer group average

35.4

32.3

26.3

20.6

1.6

1.7

Treatt

£628.3

35.7

32.8

24.6

20.8

0.8

0.9

Premium/(discount) to peer group (%)

10.6%

12.3%

19.7%

9.8%

(52.6%)

(48.9%)

Source: Refinitiv, Edison Investment Research. Note: Priced at 8 October 2021.


Exhibit 3: Financial summary

£000s

2017

2018

2019

2020

2021e

2022e

2023e

2024e

Year end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

101,250

112,163

112,717

109,016

124,278

131,735

139,639

148,017

Cost of Sales

(75,985)

(84,407)

(84,060)

(77,140)

(85,951)

(90,713)

(95,737)

(101,037)

Gross Profit

25,265

27,756

28,657

31,876

38,327

41,022

43,902

46,980

EBITDA

 

 

15,049

16,627

15,785

17,862

25,478

30,123

32,106

34,237

Operating Profit (before amort., except and SBP)

 

 

13,650

15,108

14,226

16,053

21,720

23,553

25,405

27,396

Intangible Amortisation

(137)

(124)

(90)

(75)

(64)

(54)

(46)

(39)

Share based payments

(966)

(1,040)

(637)

(886)

(1,220)

(1,441)

(1,559)

(1,685)

Other

0

0

0

0

0

0

0

0

Operating Profit

12,547

13,944

13,499

15,092

20,436

22,057

23,800

25,672

Net Interest

(851)

(1,302)

(199)

(291)

(19)

(7)

48

104

Exceptionals

0

(1,105)

(755)

(1,060)

(1,400)

0

0

0

Profit Before Tax (norm)

 

 

12,799

13,806

14,027

15,762

21,701

23,546

25,453

27,500

Profit Before Tax (FRS 3)

 

 

11,696

11,537

12,545

13,741

19,017

22,051

23,848

25,776

Profit Before Tax (company)

 

 

11,696

12,642

13,300

14,801

20,417

22,051

23,848

25,776

Tax

(3,129)

(2,284)

(2,673)

(2,896)

(4,083)

(4,410)

(4,770)

(5,155)

Profit After Tax (norm)

9,670

11,392

11,263

12,762

17,617

19,136

20,683

22,345

Profit After Tax (FRS 3)

8,567

9,253

9,872

10,845

14,934

17,640

19,078

20,621

Discontinued operations

978

2,976

(1,084)

0

0

0

0

0

Average Number of Shares Outstanding (m)

52.2

56.8

59.1

59.8

59.8

59.8

59.8

59.8

EPS - normalised (p)

 

 

18.5

20.1

19.0

21.3

29.4

32.0

34.6

37.3

EPS - adjusted (p)

 

 

18.3

18.0

17.8

19.7

27.3

29.5

31.9

34.5

EPS - (IFRS) (p)

 

 

16.4

16.3

16.7

18.1

25.0

29.5

31.9

34.5

Dividend per share (p)

4.8

5.1

5.5

6.0

8.5

9.2

9.9

10.7

Gross Margin (%)

25.0

24.7

25.4

29.2

30.8

31.1

31.4

31.7

EBITDA Margin (%)

14.9

14.8

14.0

16.4

20.5

22.9

23.0

23.1

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

13.5

13.5

12.6

14.7

17.5

17.9

18.2

18.5

Operating Margin (%)

12.4

12.0

13.8

16.4

16.7

17.0

17.3

BALANCE SHEET

Fixed Assets

 

 

19,532

21,863

31,730

54,048

62,917

61,769

62,116

62,456

Intangible Assets

3,331

752

845

1,358

1,294

1,240

1,194

1,155

Tangible Assets

14,821

20,038

29,485

50,159

60,265

59,171

59,564

59,943

Investments

1,380

1,073

1,400

2,531

1,358

1,358

1,358

1,358

Current Assets

 

 

68,230

102,401

98,158

69,472

77,335

81,115

93,329

109,210

Stocks

42,878

39,642

36,799

36,050

41,633

43,868

46,221

48,698

Debtors

19,973

28,828

23,020

24,167

27,963

29,509

31,140

32,860

Cash

4,748

32,304

37,187

7,739

7,739

7,739

15,969

27,652

Other

631

1,627

1,152

1,516

0

0

0

0

Current Liabilities

 

 

(27,003)

(35,781)

(28,905)

(15,989)

(22,224)

(14,823)

(13,266)

(13,322)

Creditors

(19,266)

(16,479)

(11,784)

(12,640)

(13,049)

(13,173)

(13,266)

(13,322)

Short term borrowings

(7,680)

(19,244)

(16,860)

(3,203)

(9,174)

(1,650)

0

0

Provisions

(57)

(58)

(261)

(146)

0

0

0

0

Long Term Liabilities

 

 

(14,281)

(6,858)

(13,876)

(16,411)

(18,348)

(14,386)

(13,361)

(13,161)

Long term borrowings

(7,293)

(3,001)

(4,369)

(3,450)

(4,587)

(825)

0

0

Other long term liabilities

(6,988)

(3,857)

(9,507)

(12,961)

(13,761)

(13,561)

(13,361)

(13,161)

Net Assets

 

 

46,478

81,625

87,107

91,120

99,680

113,675

128,819

145,183

CASH FLOW

Operating Cash Flow

 

 

4,683

3,580

20,544

15,677

15,108

26,266

28,015

29,895

Net Interest

(913)

(609)

(199)

(191)

(19)

(7)

48

104

Tax

(2,822)

(2,978)

(2,208)

(2,191)

(4,083)

(4,410)

(4,770)

(5,155)

Capex

(5,111)

(6,190)

(10,392)

(23,909)

(13,864)

(5,476)

(7,095)

(7,220)

Acquisitions/disposals

(1,667)

8,357

855

(1,041)

0

0

0

0

Financing

270

21,090

622

(69)

0

0

0

0

Dividends

(3,025)

(2,876)

(3,080)

(3,378)

(3,590)

(5,086)

(5,493)

(5,941)

Net Cash Flow

(8,585)

20,374

6,142

(15,102)

(6,449)

11,287

10,705

11,683

Opening net debt/(cash)

 

 

1,654

10,225

(10,059)

(15,958)

(427)

6,023

(5,264)

(15,969)

HP finance leases initiated

0

0

0

0

0

0

0

0

Other

14

(90)

(243)

(429)

(0)

0

0

0

Closing net debt/(cash)

 

 

10,225

(10,059)

(15,958)

(427)

6,023

(5,264)

(15,969)

(27,652)

Source: Edison Investment Research, company data


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 £49,500 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.

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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 £49,500 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 2021 Edison Investment Research Limited (Edison).

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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.

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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.

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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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Murray International Trust — Real income fund with diversified revenue stream

Murray International Trust (MYI) is managed by abrdn’s (formerly Aberdeen Standard Investments) global equity team, which is headed by Bruce Stout; he is supported by Martin Connaghan and Samantha Fitzpatrick. The fund continues to have a large weighting to emerging markets as these are where the managers see the most attractive growth prospects along with reasonable valuations. Stout refers to 2021 being a ‘year of repair and recovery’, and he is encouraged by the improvement in the trust’s income stream. In terms of capital growth, the manager believes that economic improvements outside of developed markets will be particularly in evidence in 2022 as the global COVID-19 vaccine roll-out gains momentum. Stout also favours real assets given the current inflationary environment, which is being exacerbated by issues in global supply chains.

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