Currency in GBP
Last close As at 04/02/2023
GBP6.31
▲ 15.00 (2.44%)
Market capitalisation
GBP371m
Research: Consumer
Treatt’s FY22 results were in line with the revised guidance issued in August. Management once again explained the steps that have been taken to improve processes around sales pricing and cost recovery, with new FX management systems already implemented. Coffee was reported as a standalone segment for the first time as revenues broke through £1m. While it is still early, the company expects coffee to provide significant growth in the years ahead. Management remains optimistic despite the dampened macroeconomic environment, as the market for natural and healthy products remains resilient. Our estimates are broadly unchanged.
Treatt |
Rebuilding confidence |
FY22 results |
Food and beverages |
1 December 2022 |
Share price performance
Business description
Next events
Analysts
Treatt is a research client of Edison Investment Research Limited |
Treatt’s FY22 results were in line with the revised guidance issued in August. Management once again explained the steps that have been taken to improve processes around sales pricing and cost recovery, with new FX management systems already implemented. Coffee was reported as a standalone segment for the first time as revenues broke through £1m. While it is still early, the company expects coffee to provide significant growth in the years ahead. Management remains optimistic despite the dampened macroeconomic environment, as the market for natural and healthy products remains resilient. Our estimates are broadly unchanged.
Year |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/21 |
124.3 |
22.7 |
30.1 |
7.5 |
22.2 |
1.1 |
09/22 |
140.2 |
16.5 |
21.9 |
7.9 |
30.5 |
1.2 |
09/23e |
148.6 |
17.9 |
23.4 |
8.5 |
28.5 |
1.3 |
09/24e |
157.5 |
20.3 |
26.2 |
9.5 |
25.5 |
1.4 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Profitability returned to more normal levels
FY22 revenue was £140.2m, or growth of 13% (9% at constant currency), with sales growth across all categories, with the exception of hard tea. Gross margins were down 610bp to 27.9% due to a combination of profitability returning to more normal levels following the boost during the COVID-19 pandemic, and the specific factors highlighted in the August trading update. Adjusted PBT was £15.3m, at the top end of the reduced outlook issued in August. Net debt was £22.4m at year end and reflects capital expenditure in the relocation of the UK business and investment in prudent levels of inventory to mitigate supply chain risks, as per previous guidance.
Remaining optimistic about the future
While the macroeconomic environment is undoubtedly challenging, Treatt’s management remains optimistic about the business’s growth trajectory. Flavours represent a small part of the overall cost of a beverage, but deliver the unique and authentic taste that customers associate with a particular product. Treatt’s exposure to natural and healthy products also remains in the sweet spot of what consumers are looking for. The new push into coffee should also provide a tailwind for growth as cold-brew coffee becomes more popular.
Valuation: Trades at a premium to peers
The current share price is discounting medium-term sales growth of 5.0%, falling to 2.0% in perpetuity, with a WACC of 7.7% and a terminal EBIT margin of 21.5% (vs 11.3% in FY22). Our earnings estimates remain broadly unchanged following the announcement. Treatt trades at 28.5x FY23e P/E and 17.7x FY23e EV/EBITDA. On both P/E and EV/EBITDA multiples, it trades at a c 15–25% premium to its peer group, although it trades in line with peers if we exclude those that are more exposed to lower-margin commoditised products.
Financials
Treatt’s FY22 revenues of £140.2m were in line with our expectations and the recent trading update. Company-adjusted PBT was £15.3m, slightly ahead of our £15.1m estimate and at the top end of the revised £15.0–15.3m range announced in mid-August. Adjusted EPS (as defined by Treatt) was down 27% to 19.8p. Cash flow was weaker during FY22 as heavy capital investment continued into the new UK site as planned, and there was a further build-up of inventory at year-end. This resulted in an FY22 year-end net debt position of £22.4m (versus net debt of £9.1m at end FY21).
Treatt performed well across all its categories during FY22, with the exception of tea, and the decline there was driven specifically by hard tea (which was down 78%), as consumers moved away from this subsegment and hence an important new launch by a customer was shelved. The overall Tea segment witnessed revenue decline of 31%, though the iced tea subsegment grew 9%. The Health & Wellness segment grew revenue by 15% and continued to build on prior strength, while the Fruit & Vegetables segment was up 8% in revenue terms despite the comparative being at a record +60%. The Herbs, Spices & Florals business grew by 10.4%, as on-trade consumption rebounded post pandemic. Citrus remains the largest product category and performed well, with revenues up 23%. The Synthetic Aroma business was up 13% and performed particularly well in Europe. Coffee was reported as a separate segment for the first time and revenues were up 83% on the prior year.
By geography, the UK business grew revenues by 2.9%, with citrus and coffee performing well. Sales to mainland Europe were up 25%, with strong performance in both citrus and synthetic aroma. Revenue in the United States was broadly stable (+0.7%) as strong growth in citrus offset the significant decline in hard tea. Reported revenue in China was up 6.2% notwithstanding the extended COVID-19-related restrictions in the country. The Rest of the World (excluding China) witnessed revenue growth of 26.8%, as a number of markets recovered from the pandemic.
Exhibit 1: Actual versus forecast key P&L metrics
FY22 |
|||
Estimate |
Actual |
Difference |
|
Revenue (£000s) |
138,623 |
140,185 |
1% |
Operating profit (£000s)* |
15,483 |
15,773 |
2% |
PBT (pre-exceptional) Treatt (£000s)* |
15,068 |
15,256 |
1% |
PBT (pre-exceptional) Edison (£000s) |
16,331 |
16,510 |
1% |
Basic EPS (pre-exceptional) Treatt (p)* |
19.7 |
19.8 |
0% |
Basic EPS (pre-exceptional) Edison (p) |
21.8 |
21.9 |
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.
We have updated our forecasts in light of the FY22 results and illustrate the key changes in Exhibit 2 below.
Exhibit 2: Old versus new key P&L forecasts
FY23e |
FY24e |
|||||
Old |
New |
Diff |
Old |
New |
Diff |
|
Revenue (£000s) |
146,941 |
148,596 |
1% |
155,757 |
157,512 |
1% |
Operating profit (£000s)* |
17,441 |
17,760 |
2% |
19,110 |
19,455 |
2% |
PBT (pre-exceptional) Treatt (£000s)* |
16,437 |
16,722 |
2% |
18,434 |
19,009 |
3% |
PBT (pre-exceptional) Edison (£000s) |
17,962 |
17,916 |
(0%) |
20,104 |
20,299 |
1% |
Basic EPS (pre-exceptional) Treatt (p)* |
21.2 |
21.5 |
1% |
23.5 |
24.1 |
3% |
Basic EPS (pre-exceptional) Edison (p) |
23.7 |
23.4 |
(1%) |
26.2 |
26.2 |
(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.
Valuation
We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 3. For 2023, Treatt trades at a c 25% premium to its peer group on a P/E basis and a c 15% premium on an 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 at a significantly smaller premium to the remaining peers on both P/E and EV/EBITDA. Although it is smaller than its peers, Treatt’s 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 (%) |
|||||
2022e |
2023e |
2022e |
2023e |
2022e |
2023e |
|||
Givaudan |
CHF 28,985 |
33.2 |
29.8 |
22.4 |
21.5 |
2.1 |
2.3 |
|
IFF |
$26,980 |
19.0 |
18.2 |
14.8 |
14.3 |
3.0 |
3.0 |
|
Symrise |
CHF 15,114 |
33.3 |
30.4 |
18.1 |
17.1 |
1.1 |
1.2 |
|
Chr Hansen |
DKK 57,567 |
33.4 |
29.0 |
20.0 |
17.8 |
1.9 |
2.3 |
|
Kerry |
€ 15,903 |
20.6 |
18.7 |
15.0 |
13.8 |
1.1 |
1.3 |
|
Ingredion |
$6,422 |
13.6 |
12.3 |
8.6 |
8.0 |
3.1 |
2.8 |
|
Peer group average |
25.5 |
23.1 |
16.5 |
15.4 |
2.1 |
2.1 |
||
Treatt |
£402 |
30.5 |
28.5 |
21.7 |
17.7 |
1.2 |
1.3 |
|
Premium/(discount) to peer group (%) |
19.7% |
23.7% |
31.9% |
14.6% |
(42.8%) |
(40.3%) |
Source: Refinitiv, Edison Investment Research. Note: Prices as at 30 November 2022.
Exhibit 4: Financial summary
£000's |
2020 |
2021 |
2022 |
2023e |
2024e |
2025e |
||
Year end September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
109,016 |
124,326 |
140,185 |
148,596 |
157,512 |
165,387 |
Cost of Sales |
(77,140) |
(82,103) |
(101,101) |
(106,127) |
(111,392) |
(115,804) |
||
Gross Profit |
31,876 |
42,223 |
39,084 |
42,469 |
46,120 |
49,584 |
||
EBITDA |
|
|
17,862 |
24,877 |
19,503 |
23,985 |
25,810 |
27,419 |
Operating profit (before amort. and excepts.) |
|
|
16,053 |
23,172 |
17,027 |
18,954 |
20,745 |
22,118 |
Intangible Amortisation |
(75) |
(93) |
(215) |
(183) |
(155) |
(132) |
||
Share based payments |
(886) |
(1,733) |
(1,039) |
(1,011) |
(1,135) |
(1,227) |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
15,092 |
21,346 |
15,773 |
17,760 |
19,455 |
20,759 |
||
Net Interest |
(291) |
(427) |
(517) |
(1,038) |
(446) |
(199) |
||
Exceptionals |
(1,060) |
(1,302) |
923 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
15,762 |
22,745 |
16,510 |
17,916 |
20,299 |
21,919 |
Profit Before Tax (FRS 3) |
|
|
13,741 |
19,617 |
16,179 |
16,722 |
19,009 |
20,560 |
Profit Before Tax (company adjusted) |
|
|
14,801 |
20,919 |
15,256 |
16,722 |
19,009 |
20,560 |
Tax |
(2,896) |
(4,469) |
(2,864) |
(3,762) |
(4,467) |
(4,832) |
||
Profit After Tax (norm) |
12,762 |
18,090 |
13,215 |
14,153 |
15,832 |
17,088 |
||
Profit After Tax (FRS 3) |
10,845 |
15,148 |
13,315 |
12,959 |
14,542 |
15,728 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
0 |
||
Average Number of Shares Outstanding (m) |
59.8 |
60.1 |
60.4 |
60.4 |
60.4 |
60.4 |
||
EPS - normalised (p) |
|
|
21.3 |
30.1 |
21.9 |
23.4 |
26.2 |
28.3 |
EPS - adjusted (p) |
|
|
19.7 |
27.1 |
25.3 |
21.5 |
24.1 |
26.0 |
EPS - (IFRS) (p) |
|
|
18.1 |
25.2 |
22.0 |
21.5 |
24.1 |
26.0 |
Dividend per share (p) |
6.0 |
7.5 |
7.9 |
8.5 |
9.5 |
10.3 |
||
Gross Margin (%) |
29.2 |
34.0 |
27.9 |
28.6 |
29.3 |
30.0 |
||
EBITDA Margin (%) |
16.4 |
20.0 |
13.9 |
16.1 |
16.4 |
16.6 |
||
Operating Margin (before GW and except.) (%) |
14.7 |
18.6 |
12.1 |
12.8 |
13.2 |
13.4 |
||
Operating Margin (%) |
13.8 |
17.2 |
11.3 |
12.0 |
12.4 |
12.6 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
54,048 |
65,811 |
79,644 |
80,502 |
81,645 |
83,020 |
Intangible Assets |
1,358 |
2,424 |
3,206 |
3,023 |
2,868 |
2,736 |
||
Tangible Assets |
50,159 |
61,039 |
74,281 |
77,479 |
78,777 |
80,284 |
||
Investments |
2,531 |
2,348 |
2,157 |
0 |
0 |
0 |
||
Current Assets |
|
|
69,472 |
83,606 |
108,537 |
97,456 |
102,689 |
107,210 |
Stocks |
36,050 |
47,263 |
68,351 |
62,410 |
65,840 |
68,801 |
||
Debtors |
24,167 |
26,371 |
37,113 |
32,691 |
34,495 |
36,054 |
||
Cash |
7,739 |
7,260 |
2,354 |
2,354 |
2,354 |
2,354 |
||
Other |
1,516 |
2,712 |
719 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(15,989) |
(30,460) |
(46,224) |
(28,211) |
(25,544) |
(22,053) |
Creditors |
(12,640) |
(17,620) |
(23,792) |
(19,464) |
(19,790) |
(19,909) |
||
Short term borrowings |
(3,203) |
(12,697) |
(22,035) |
(8,350) |
(5,357) |
(1,748) |
||
Provisions |
(146) |
(143) |
(397) |
(397) |
(397) |
(397) |
||
Long Term Liabilities |
|
|
(16,411) |
(11,605) |
(7,711) |
(10,544) |
(9,047) |
(7,243) |
Long term borrowings |
(3,450) |
(2,624) |
(2,342) |
(4,175) |
(2,678) |
(874) |
||
Other long term liabilities |
(12,961) |
(8,981) |
(5,369) |
(6,369) |
(6,369) |
(6,369) |
||
Net Assets |
|
|
91,120 |
107,352 |
134,246 |
139,203 |
149,742 |
160,934 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
15,677 |
13,442 |
(1,830) |
30,019 |
20,903 |
23,016 |
Net Interest |
(191) |
(270) |
(382) |
(1,038) |
(446) |
(199) |
||
Tax |
(2,191) |
(4,874) |
443 |
(3,762) |
(4,467) |
(4,832) |
||
Capex |
(23,909) |
(13,195) |
(11,849) |
(8,229) |
(6,363) |
(6,808) |
||
Acquisitions/disposals |
(1,041) |
(1,178) |
4,672 |
0 |
0 |
0 |
||
Financing |
(69) |
238 |
475 |
0 |
0 |
0 |
||
Dividends |
(3,378) |
(3,704) |
(4,834) |
(4,741) |
(5,137) |
(5,764) |
||
Net Cash Flow |
(15,102) |
(9,541) |
(13,305) |
12,248 |
4,490 |
5,414 |
||
Opening net debt/(cash) |
|
|
(15,958) |
(427) |
9,114 |
22,419 |
10,171 |
5,681 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
(429) |
(0) |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(427) |
9,114 |
22,419 |
10,171 |
5,681 |
267 |
Source: Edison Investment Research, Company data
|
|
Research: Investment Companies
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