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Research: Consumer
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
Treatt |
Return to growth in FY23 |
FY23 results |
Food and beverages |
30 November 2023 |
Share price performance
Business description
Next events
Analysts
Treatt is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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%).
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Exhibit 1: Continuing revenue by geography (FY23) |
Exhibit 2: Revenue by product category (FY23) |
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Source: Treatt |
Source: Treatt |
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Exhibit 1: Continuing revenue by geography (FY23) |
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Source: Treatt |
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Exhibit 2: Revenue by product category (FY23) |
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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.
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Exhibit 4: Treatt EBITDA and operating margin, FY15–25e |
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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%) |
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Source: Refinitiv, Edison Investment Research. Note: Priced at 30 November 2023.
Exhibit 6: Financial summary
£000's |
2020 |
2021 |
2022 |
2023 |
2024e |
2025e |
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Year-end 30 September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
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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 |
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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 |
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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) |
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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
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Research: Consumer
Topps Tiles’ (TPT’s) FY23 results confirm the strong progress made, with its focus on growing profitable market share by developing and diversifying its operations. The success is shown in record revenue for the Topps Tiles branded stores and the group as a whole, aided by the achievement of its ‘1 in 5 by 2025’ market share goal two years earlier than predicted. An improving cost environment has translated into an underlying improvement in gross margin through the year, as expected by management. The current trading statement confirms a more challenging external environment since the summer, as reported by others, but management is confident of further market share gains in coming years, with greater visibility on operating costs than there has been recently.