Treatt — Rebuilding confidence

Treatt (LSE: TET)

Currency in GBP

Last close As at 04/02/2023

GBP6.31

15.00 (2.44%)

Market capitalisation

GBP371m

Research: Consumer

Treatt — Rebuilding confidence

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.

Sara Welford

Written by

Sara Welford

Director, Consumer

Consumer

Treatt

Rebuilding confidence

FY22 results

Food and beverages

1 December 2022

Price

668p

Market cap

£400m

Net debt (£m) at 30 September 2022

22.4

Shares in issue

59.9m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.1

29.0

(40.1)

Rel (local)

(3.5)

24.8

(41.7)

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.

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Next events

AGM statement

End January 2023

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 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
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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
(m)

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


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).

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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 £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).

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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.

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.

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Baillie Gifford China Growth Trust — Finding big trendsetters amid ‘little giants’

Baillie Gifford China Growth Trust (BGCG) invests in China, aiming to capture current trendsetters and spot future potential market leaders, for a long-term time horizon (typically over five years). Despite negative newsflow about China over the last year and a half and the recent political changes, interpreted by the world investment community as the prevalence of ideology over economic principles, the investment manager, Baillie Gifford (BG), believes that the investment case stands firm. A greater focus on self-sufficiency, productivity and innovation in China should support domestic opportunities in certain key sectors, including renewable energy, software and technology. The new phase of development may reward patient investors who see the big picture of Chinese growth.

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