Treatt — Return to growth in FY23

Treatt (LSE: TET)

Last close As at 04/03/2024

420.00

2.00 (0.48%)

Market capitalisation

257m

More on this equity

Research: Consumer

Treatt — Return to growth in FY23

Treatt’s FY23 results show a significantly improved y-o-y operating performance, delivering revenue and profit growth alongside record cash generation. Sales in H223 were affected by the destocking of inventory from clients, although management notes early signs of this reversing. Particularly strong growth came from Treatt’s new markets segment (Coffee, China and Treattzest), up 61% y-o-y. Record cash generation resulted in net debt more than halving to £10.4m. Management is focusing on volume growth in FY24 to deliver revenue growth of 5–7%, which is expected to be H2 weighted. Investment in sales and innovation will look to ensure future product growth while cost discipline and efficiencies should enable net operating margin expansion.

Written by

Milo Bussell

Associate Analyst, Consumer and Media

Treatt_resized

Consumer

Treatt

Return to growth in FY23

FY23 results

Food and beverages

30 November 2023

Price

455p

Market cap

£278m

Net debt (£m) at 30 September 2023

10.4

Shares in issue

61.1m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.6

(18.3)

(31.9)

Rel (local)

(2.6)

(19.6)

(31.2)

52-week high/low

724.00p

423.50p

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

H124 trading update

12 April 2024

H124 results

9 May 2024

Analysts

Milo Bussell

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Treatt is a research client of Edison Investment Research Limited

Treatt’s FY23 results show a significantly improved y-o-y operating performance, delivering revenue and profit growth alongside record cash generation. Sales in H223 were affected by the destocking of inventory from clients, although management notes early signs of this reversing. Particularly strong growth came from Treatt’s new markets segment (Coffee, China and Treattzest), up 61% y-o-y. Record cash generation resulted in net debt more than halving to £10.4m. Management is focusing on volume growth in FY24 to deliver revenue growth of 5–7%, which is expected to be H2 weighted. Investment in sales and innovation will look to ensure future product growth while cost discipline and efficiencies should enable net operating margin expansion.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/22

140.2

16.5

21.9

7.9

20.8

1.7

09/23

147.4

19.0

25.6

8.0

17.8

1.8

09/24e

156.0

20.4

26.3

8.6

17.3

1.9

09/25e

163.8

22.3

28.8

9.0

15.8

2.0

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

Sales and profit growth in FY23

Treatt reported revenue growth of 5.1% in FY23 to £147.4m, as pricing actions implemented to offset raw material cost inflation more than counterbalanced lower volumes due to client destocking. Profitability improved as pre-exceptionals PBT grew 14% to £17.3m, following a targeted restructuring programme implemented in August and operational efficiencies from the relocation to the Skyliner Way facility. Record cash generation enabled net debt to more than halve in the year to £10.4m, resulting in lower leverage at 0.45x net debt/EBITDA (FY22: 1.21x). Due to the robust capital discipline and strong financial performance in the year, management increased the FY23 dividend by 2% to 8p (FY22: 7.9p).

Estimates unchanged

Our estimates for FY24 and FY25 are unchanged, as we anticipate revenue growth of 5–6% and a greater growth rate for adjusted PBT of 10–13%. We expect a slightly lower but more normalised gross margin of 29.4% in FY24, well within management’s guided range of 28–30%. We continue to expect strong cash generation and a normalisation of capex, resulting in a reduction in net debt from £10.4m in FY23 to £5.4m in FY24, returning to a net cash position of £0.6m in FY25.

Valuation: Discount to peers

The share price has been weak year to date, down 27% against the peer average decline of 3%. As such, Treatt trades on FY24e multiples of 17.3x P/E and 10.7x EV/EBITDA, a discount of 23% and 28% respectively to its international peers. We believe that consistent delivery against financial targets should see the valuation gap narrow, with Treatt having historically traded at a premium to its peer group.

FY23 results overview

Income statement

Treatt reported a resilient trading performance in FY23 despite the tougher trading environment towards the end of the financial year, which saw a destocking from clients seeking to reduce inventory levels and manage working capital. Revenue was up 5.1% to £147.4m (FY22: £140.2m), driven by pricing as volumes declined in the year. Pricing actions to offset raw material cost inflation, coupled with operational efficiencies and the exit from some lower-margin citrus businesses, successfully enabled management to weather the pressure on profitability. As a result, gross profit rose 14.7% to £44.8m with a 250bp margin expansion to 30.4% (FY22: 27.9%).

Exhibit 1: Continuing revenue by geography (FY23)

Exhibit 2: Revenue by product category (FY23)

Source: Treatt

Source: Treatt

Exhibit 1: Continuing revenue by geography (FY23)

Source: Treatt

Exhibit 2: Revenue by product category (FY23)

Source: Treatt

By geography, Treatt’s largest market, the US, delivered a strong year for the group as sales grew by 14% to account for 42% (FY22: 38%) of total FY23 revenue. Pricing action, particularly in the citrus category, helped to boost sales. The UK and Europe regions both experienced a weaker FY23, as the impact of the sector destocking resulted in revenue declining by 18% and 23%, respectively. Management remains excited about the growth opportunity in China, which reported a 21% increase in revenue to £9.5m despite a longer COVID-19-related lockdown period. Treatt now sells to three out of four of the largest Chinese national beverage brands and the group continues to invest to ensure that it can capitalise on the potentially large market opportunity.

Looking at product category, Treatt’s largest revenue stream, its heritage category, which includes citrus (ex-China and Treattzest), synthetic aroma and herb, spice & florals, delivered a resilient 1% uplift in revenue. This growth was mainly driven by pricing actions in the year. Premium categories, including fruit & vegetable, health & wellness and tea, were flat y-o-y at £34m as volume declines were offset by price increases. New categories demonstrated strong sales growth, albeit from a lower base, of 61% in FY23. This product area includes China (previously discussed) and coffee, which demonstrated particularly robust revenue growth, now accounting for £5m of sales (FY22: £1.1m) as Treatt focuses on the fast-growing premium and ready-to-drink markets.

Exhibit 3: FY23 income statement highlights

£m

FY22

FY23

Y-o-y growth (%)

Revenue

140.19

147.40

5%

Gross profit

39.08

44.82

15%

Gross profit margin (%)

27.9%

30.4%

250 bps

EBITDA

18.46

23.00

25%

PBT

15.26

17.34

14%

Net income

11.96

13.94

17%

EPS (p)

19.80

22.94

16%

DPS (p)

7.85

8.01

2%

Source: Treatt

The improvement in profitability highlights management’s successful mitigation of raw material inflationary pressures through pricing actions and disciplined cost controls implemented in the year. Headcount was reduced by 14%, while there was a higher depreciation charge due to the first full year of depreciation relating to the new Skyliner Way facility. Management expects to deliver margin improvement towards the mid-term guidance of c 15% EBIT margin, as investment in sales and innovation should drive higher realised growth, coupled with operational efficiencies, particularly now the relocation to Skyliner Way is complete. In Exhibit 4 we show Treatt’s EBITDA and operating margin over FY15–25e to highlight the recovery in FY23 and improvement that we forecast in FY24–25e.

Exhibit 4: Treatt EBITDA and operating margin, FY15–25e

Source: Edison Investment Research, Treatt

Adjusted basic EPS rose 16% to 22.94p, reflecting the higher profitability in the year. A final dividend of 5.46p was paid, resulting in a total FY23 dividend of 8.01p (FY22: 7.85p), which is covered 2.8x on a three-year rolling basis.

Balance sheet and cash flow

Treatt reported a strong improvement in cash flow as it focused on working capital efficiencies and capital controls, delivering record cash generation in FY23. FY23 saw a net cash inflow of £4.8m compared with a net outflow of £4.2m in FY22. This net inflow was despite including a £7.1m repayment of bank loans and borrowings. Operating cash flow improved significantly due to management’s focus on capital controls, a reduction in capex and more favourable working capital. Having completed the relocation to the Skyliner Way facility, management expects capex to normalise.

The strong focus on cash generation helped to more than halve net debt to £10.4m (FY22: £22.4m), resulting in the group reporting a lower level of net debt to EBITDA leverage of 0.45x (FY22: 1.21x). Management expects net debt to reduce in FY24, and we forecast Treatt returning to a net cash position in FY25.

Valuation

We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 5 below. Treatt’s share price has been weak in 2023, down 27% versus the peer average decline of 3%. Consequently, Treatt is trading on FY24e multiples of 17.3x P/E and 10.7x EV/EBITDA, reflecting discounts of 23% and 28%, respectively. Given that Treatt has historically traded at a premium to its peer group, we expect the valuation gap to narrow as management delivers on financial targets, including the reduction of net debt, while continuing to grow its increasingly specialised product portfolio.

Exhibit 5: Comparative valuation

PE (x)

EV/EBITDA (x)

Dividend yield (%)

Market cap (m)

2024e

2025e

2024e

2025e

2024e

2025e

Givaudan

CHF 29,823

30.1

27.6

21.7

20.4

2.2

2.3

IFF

$19,205

18.5

15.9

13.4

12.1

4.2

4.2

Symrise

CHF 14,201

28.5

25.2

16.1

14.8

1.2

1.3

Chr Hansen

DKK 70,643

32.6

29.3

20.1

18.5

1.9

2.2

Kerry

€ 13,027

15.6

14.0

11.6

10.7

1.7

1.9

Ingredion

€ 6,597

10.4

9.9

7.0

6.7

3.1

3.2

Peer group average

22.6

20.3

15.0

13.9

2.4

2.5

Treatt

£278

17.3

15.8

10.7

9.9

1.9

2.0

Premium/(discount) to peer group

(23.4%)

(22.1%)

(28.3%)

(28.8%)

(21.3%)

(21.2%)

Source: Refinitiv, Edison Investment Research. Note: Priced at 30 November 2023.

Exhibit 6: Financial summary

£000's

2020

2021

2022

2023

2024e

2025e

Year-end 30 September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

109,016

124,326

140,185

147,397

156,026

163,827

Cost of Sales

(77,140)

(82,103)

(101,101)

(102,573)

(110,185)

(114,875)

Gross Profit

31,876

42,223

39,084

44,824

45,841

48,952

EBITDA

 

 

17,862

24,877

19,503

24,219

27,853

30,253

EBITDA (company)

 

 

16,976

23,144

18,464

22,997

26,717

29,007

Operating profit (before amort. and excepts.)

 

 

16,053

23,172

17,027

19,942

21,421

23,333

Intangible Amortisation

(75)

(93)

(215)

(399)

(155)

(132)

Share based payments

(886)

(1,733)

(1,039)

(1,222)

(1,136)

(1,246)

Other

0

0

0

0

0

0

Operating Profit

15,092

21,346

15,773

18,321

20,130

21,955

Net Interest

(291)

(427)

(517)

(977)

(1,042)

(1,016)

Exceptionals

(1,060)

(1,302)

923

(3,800)

0

0

Profit Before Tax (norm)

 

 

15,762

22,745

16,510

18,965

20,379

22,317

Profit Before Tax (IFRS 3)

 

 

13,741

19,617

16,179

13,544

19,088

20,939

Profit Before Tax (company)

 

 

14,801

20,919

15,256

17,344

19,088

20,939

Tax

(2,896)

(4,469)

(2,864)

(2,602)

(4,486)

(4,921)

Profit After Tax (norm)

12,762

18,090

13,215

15,560

15,893

17,396

Profit After Tax (IFRS 3)

10,845

15,148

13,315

10,942

14,602

16,018

Average Number of Shares Outstanding (m)

59.8

60.1

60.3

60.8

60.5

60.5

EPS - normalised (p)

 

 

21.3

30.1

21.9

25.6

26.3

28.8

EPS - adjusted (p)

 

 

19.7

27.1

25.4

22.9

24.1

26.5

EPS - (IFRS) (p)

 

 

18.1

25.2

22.1

18.0

24.1

26.5

Dividend per share (p)

6.0

7.5

7.9

8.0

8.6

9.0

Gross Margin (%)

29.2

34.0

27.9

30.4

29.4

29.9

EBITDA Margin (%)

16.4

20.0

13.9

16.4

17.9

18.5

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

14.7

18.6

12.1

13.5

13.7

14.2

Operating Margin (%)

13.8

17.2

11.3

12.4

12.9

13.4

BALANCE SHEET

Fixed Assets

 

 

54,048

65,811

79,644

78,539

81,430

81,155

Intangible Assets

1,358

2,424

3,206

2,752

2,868

2,736

Tangible Assets

50,159

61,039

74,281

71,526

78,563

78,420

Investments

2,531

2,348

2,157

4,261

0

0

Current Assets

 

 

69,472

83,606

108,537

96,482

101,274

108,350

Stocks

36,050

47,263

68,351

62,396

65,063

70,937

Debtors

24,167

26,371

37,113

32,969

33,858

35,059

Cash

7,739

7,260

2,354

809

2,354

2,354

Other

1,516

2,712

719

308

0

0

Current Liabilities

 

 

(15,989)

(30,460)

(46,224)

(32,375)

(25,620)

(22,308)

Creditors

(12,640)

(17,620)

(23,792)

(21,631)

(20,080)

(20,712)

Short term borrowings

(3,203)

(12,697)

(22,035)

(10,642)

(5,143)

(1,199)

Provisions

(146)

(143)

(397)

(102)

(397)

(397)

Long Term Liabilities

 

 

(16,411)

(11,605)

(7,711)

(4,851)

(8,941)

(6,969)

Long term borrowings

(3,450)

(2,624)

(2,342)

0

(2,572)

(600)

Other long term liabilities

(12,961)

(8,981)

(5,369)

(4,851)

(6,369)

(6,369)

Net Assets

 

 

91,120

107,352

134,246

137,795

148,144

160,228

CASH FLOW

Operating Cash Flow

 

 

15,677

13,442

(1,830)

23,665

21,732

23,809

Net Interest

(191)

(270)

(382)

(1,078)

(1,042)

(1,016)

Tax

(2,191)

(4,874)

443

(2,174)

(4,486)

(4,921)

Capex

(23,909)

(13,195)

(11,849)

(5,507)

(6,340)

(6,777)

Acquisitions/disposals

(1,041)

(1,178)

4,672

1,350

0

0

Financing

(69)

238

475

583

0

0

Dividends

(3,378)

(3,704)

(4,834)

(4,802)

(4,843)

(5,180)

Net Cash Flow

(15,102)

(9,541)

(13,305)

12,037

5,021

5,916

Opening net debt/(cash)

 

 

(15,958)

(427)

9,114

22,419

10,382

5,361

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

10,382

5,361

(555)

Source: Company accounts, Edison Investment Research

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 2023 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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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 2023 Edison Investment Research Limited (Edison).

Australia

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.

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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