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Currency in GBP
Last close As at 09/06/2023
GBP6.93
▲ −5.00 (−0.72%)
Market capitalisation
GBP418m
Research: Consumer
Treatt’s unexpected trading statement of 15 August reduced FY22 pre-tax profit guidance to a range of £15.0–15.3m versus our previous forecast of £21.9m (pre-exceptional rather than normalised). The main drivers of the downgrade were lower sales in tea, driven by weak consumer confidence in the United States; over-hedging, which resulted in losses crystallising due to the devaluation of sterling against the US dollar; continued input cost inflation; and slower growth in China owing to ongoing COVID-19 restrictions. All categories excluding tea are showing strong momentum, and the company is taking active steps to limit its FX exposure and prevent over-hedging in future. Management remains confident in the long-term growth drivers for Treatt.
Treatt |
Rebasing expectations |
Trading update |
Food and beverages |
7 September 2022 |
Share price performance
Business description
Next events
Analysts
Treatt is a research client of Edison Investment Research Limited |
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Treatt’s unexpected trading statement of 15 August reduced FY22 pre-tax profit guidance to a range of £15.0–15.3m versus our previous forecast of £21.9m (pre-exceptional rather than normalised). The main drivers of the downgrade were lower sales in tea, driven by weak consumer confidence in the United States; over-hedging, which resulted in losses crystallising due to the devaluation of sterling against the US dollar; continued input cost inflation; and slower growth in China owing to ongoing COVID-19 restrictions. All categories excluding tea are showing strong momentum, and the company is taking active steps to limit its FX exposure and prevent over-hedging in future. Management remains confident in the long-term growth drivers for Treatt.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/20 |
109.0 |
15.8 |
21.3 |
6.0 |
27.1 |
1.0% |
09/21 |
124.3 |
22.7 |
30.1 |
7.5 |
19.2 |
1.3% |
09/22e |
138.6 |
16.3 |
21.8 |
7.5 |
26.5 |
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.
Tea is a high-margin category
Tea flavours are highly specialised and the category as a whole is one of the higher margin contributors at Treatt. Given declining consumer confidence, one of Treatt’s beverage customers made the decision to reduce the scale of a new launch in the category, thus the launch was across fewer states in the United States, and with more subdued marketing support. This resulted in a loss in sales, and at extremely high margin, causing c £2.5m of the downgrade to profits.
Hedging to be tightened
Treatt’s FX exposure is both transactional and translational. Hedging for the translational exposure is fairly straightforward, but the transactional portion is complex, as the exposure is also partly offset by some natural hedges. FX should have been a net benefit during FY22 given the weakening of sterling versus the US dollar, but over-hedging caused a £2.5m loss. Management has already closed out Treatt’s over-hedged positions and plans are in place to use market experts to improve the way the hedges are managed, which should return hedging to a mere technicality utilised to smooth out any volatility, rather than having a material effect on profitability.
Valuation: Fair value of 630p
Treatt trades at 26.5x and 16.4x FY22 P/E and EV/EBITDA, broadly in line with its peers. 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 on our rebased forecasts is 630p (previously 737p).
Forecast changes
While our sales forecasts are only decreasing by c 3%, our profit forecasts are down c 30% due to the reasons detailed above. Management estimates a £2.5m downgrade to profits caused by the disappointment in the tea business, a further £2.5m loss due to FX downgrades, a c £1m impact from rising input costs and the inability to pass these on entirely to the customers, with the remainder of the downgrade (c £700,000) caused by the ongoing COVID-19 restrictions in China. We detail the changes to our estimates in Exhibit 1.
Our net debt estimate increases materially in FY22 and swings from forecast net cash to net debt for FY23 and FY24. This is driven by the downgrade in profit but also by an increase in our forecast of the working capital outflow, which in turn is caused by the current inflationary environment.
Exhibit 1: Change in key forecasts (FY22–24e)
FY22e |
FY23e |
FY24e |
|||||||
Forecast |
Old |
New |
Diff |
Old |
New |
Diff |
Old |
New |
Diff |
Revenue (£000) |
142,975 |
138,623 |
(3%) |
151,553 |
146,941 |
(3%) |
160,647 |
155,757 |
(3%) |
EBITDA (£000) |
28,976 |
21,682 |
(25%) |
30,960 |
23,990 |
(23%) |
33,035 |
25,839 |
(22%) |
Operating profit (£000) |
21,974 |
15,483 |
(30%) |
23,747 |
17,441 |
(27%) |
25,654 |
19,110 |
(26%) |
PBT (pre exceptional) Treatt (£000) |
21,927 |
15,068 |
(31%) |
23,723 |
16,437 |
(31%) |
25,677 |
18,434 |
(28%) |
PBT (normalised) Edison (£000) |
23,978 |
16,331 |
(32%) |
25,893 |
17,962 |
(31%) |
27,982 |
20,104 |
(28%) |
Basic EPS (pre exceptional) Treatt (p) |
28.7 |
19.7 |
(31%) |
30.6 |
21.2 |
(31%) |
32.7 |
23.5 |
(28%) |
Basic EPS (normalised) Edison (p) |
32.1 |
21.8 |
(32%) |
34.2 |
23.7 |
(31%) |
36.5 |
26.2 |
(28%) |
Net debt/(cash) (£000) |
7,988.6 |
18,245.8 |
128% |
(167.6) |
16,647.8 |
nm |
(11,015.2) |
11,854.3 |
nm |
Source: Edison Investment Research. Note: Edison normalised figures are pre-exceptional and also exclude share-based payments and amortisation of acquired intangibles.
Process changes
The reduction in profit guidance is clearly a disappointment for all stakeholders in the business, with the share price falling 34% (from 803p to 533p) on the day it was announced. That said, it does provide an opportunity for greater controls to be embedded into the business as it grows. The recent capital markets day on 30 May showcased Treatt’s new facility, which is significantly more automated than its old factory, and hence should allow for plenty of efficiencies, thus resulting in cost savings. As the company has undergone a period of strong growth, it has also had to build its cost base: among these have been new hires such as Wolfgang Tosch, the new global chief innovation officer, and a full team of experts for its new coffee business. While investment in the business is essential for future success, we believe management is likely to now shift its focus to delivering on the efficiencies and cost savings from its new facilities.
As discussed above, new controls and processes are being put in place to manage hedging. In addition, we expect a more robust budgeting process, which will differentiate more effectively between contracted sales and more discretionary launches. Furthermore, launches that are deemed higher risk, such as the one in the tea category that resulted in the downgrade, are to be managed more cautiously.
Treatt remains exposed to high-growth categories that are in the sweet spot of consumer preferences, such as sugar reduction. While weakening consumer confidence is obviously a concern for all FMCG businesses, the core of Treatt’s business is in less discretionary products, as highlighted at the height of the pandemic when demand did not decline.
Valuation
We show Treatt’s relative valuation versus its ingredients peer group in Exhibit 2 below. For 2022, based on Edison estimates, Treatt trades broadly in line with its peer group on both a P/E and EV/EBITDA basis, although we note that Kerry and Ingredion have a larger proportion of lower-margin products in their portfolios. If we exclude Kerry and Ingredion, Treatt is trading at a c 10% discount to its remaining peers on both P/E and EV/EBITDA, although we recognise Treatt is smaller than its peers.
Exhibit 2: Comparative valuation
Market cap |
P/E (x) |
EV/EBITDA (x) |
Dividend yield (%) |
|||||
2022e |
2023e |
2022e |
2023e |
2022e |
2023e |
|||
Givaudan |
CHF 28,333 |
31.5 |
28.1 |
21.8 |
20.5 |
2.2 |
2.3 |
|
IFF |
$27,491 |
19.0 |
17.0 |
15.3 |
14.1 |
2.8 |
3.0 |
|
Symrise |
CHF 14,377 |
32.0 |
29.0 |
17.9 |
16.9 |
1.1 |
1.2 |
|
Chr Hansen |
DKK 56,710 |
32.9 |
28.7 |
19.8 |
17.9 |
2.0 |
2.2 |
|
Kerry |
€ 17,615 |
22.8 |
20.6 |
16.5 |
15.2 |
1.0 |
1.1 |
|
Ingredion |
$5,603 |
12.0 |
10.8 |
7.8 |
7.3 |
3.1 |
3.2 |
|
Peer group average |
25.0 |
22.4 |
16.5 |
15.3 |
2.0 |
2.2 |
||
Treatt |
£347 |
26.5 |
24.3 |
16.4 |
14.8 |
1.3 |
1.4 |
|
Premium/(discount) to peer group (%) |
5.7% |
8.8% |
(0.5%) |
(3.0%) |
(36.3%) |
(35.5%) |
||
Source: Refinitiv, Edison Investment Research. Note: Prices as of 5 September 2022.
We also value Treatt on a DCF basis. Our longer-term assumptions remain unchanged: longer-term sales growth of 5.0% pa, falling to 2% growth in perpetuity; and a WACC of 7.7% (predicated on a beta of 0.8, a risk-free rate of 4.0%, an equity risk premium of 5.0% and a borrowing spread of 5.0%). This results in a fair value of 630p (previously 737p), as we have reduced our near-term forecasts as detailed above.
We illustrate a sensitivity analysis in Exhibit 3 below. The current share price is discounting medium-term sales growth of 3.3%, falling to 2.0% in perpetuity, with a WACC of 7.7%.
Exhibit 3: DCF sensitivity to terminal growth rate and medium-term sales growth (p/share)
Medium-term sales growth |
||||||
2.0% |
3.0% |
4.0% |
5.0% |
6.0% |
||
Terminal growth |
0.5% |
451 |
477 |
504 |
533 |
563 |
1.0% |
474 |
501 |
530 |
560 |
592 |
|
1.5% |
500 |
529 |
560 |
592 |
626 |
|
2.0% |
531 |
562 |
595 |
630 |
667 |
|
2.5% |
567 |
601 |
637 |
675 |
715 |
|
3.0% |
611 |
648 |
688 |
729 |
773 |
|
Source: Edison Investment Research
Exhibit 4: Financial summary
£000s |
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 |
16,571 |
16,746 |
18,966 |
20,781 |
|
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 |
95,979 |
101,302 |
87,363 |
97,716 |
Stocks |
36,050 |
47,263 |
58,222 |
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) |
(35,761) |
(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) |
(17,004) |
(15,939) |
0 |
0 |
||
Provisions |
(146) |
(143) |
(143) |
(143) |
(143) |
(143) |
||
Long Term Liabilities |
|
|
(16,411) |
(11,605) |
(18,483) |
(17,950) |
(9,981) |
(9,981) |
Long term borrowings |
(3,450) |
(2,624) |
(8,502) |
(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 |
6,091 |
19,014 |
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) |
(9,132) |
1,598 |
4,794 |
5,883 |
||
Opening net debt/(cash) |
|
|
(15,958) |
(427) |
9,114 |
18,246 |
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 |
18,246 |
16,648 |
11,854 |
5,972 |
Source: Edison Investment Research, company data
|
|
Research: Consumer
Else Nutrition’s Q222 results demonstrate the growth momentum in the business, with management delivering on its stated goal to reach a C$1m quarterly revenue run rate on Amazon.com by the end of Q2, and on track to reach listings in 4,000 retail stores by the end of FY22, with listings currently in over 3,000 stores. Else added nearly 2,000 stores during Q2, and boosted its cash position with a funding round of C$7.3m at the end of June. Else continues to build its platform for the long term, with plans to enter China in Q3 and the UK in Q4. Further European markets will follow in FY23.
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