Treatt — Reverting to a normal split

Treatt (LSE: TET)

Currency in GBP

Last close As at 30/01/2023

GBP6.27

−1.00 (−0.16%)

Market capitalisation

GBP377m

Research: Consumer

Treatt — Reverting to a normal split

Treatt has continued to perform well, with the good business momentum continuing into H122. As previously flagged and as consumers emerge from the pandemic, the performance in FY22 is expected to return to more normal beverage trends, with H2 seasonally stronger than H1, and a shift back to on-trade beverage consumption. In addition, the higher-margin healthier living categories are also expected to perform better in H2, which will be reflected in the split of profitability. We raise our revenue forecasts to reflect the strong momentum, but our profit estimates remain broadly unchanged, due to mix considerations and cost inflation.

Sara Welford

Written by

Sara Welford

Director, Consumer

Consumer

Treatt

Reverting to a normal split

H1 trading update

Food & beverages

11 April 2022

Price

1,158p

Market cap

£694m

Approximate net debt (£m) at 31 March 2022

20

Shares in issue

60.5m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

26.1

5.1

22.4

Rel (local)

14.6

(5.3)

13.9

52-week high/low

1,315p

900p

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

H122 results

10 May 2022

FY trading update

September/October 2022

FY22 results

29 November 2022

Analysts

Sara Welford

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Treatt is a research client of Edison Investment Research Limited

Treatt has continued to perform well, with the good business momentum continuing into H122. As previously flagged and as consumers emerge from the pandemic, the performance in FY22 is expected to return to more normal beverage trends, with H2 seasonally stronger than H1, and a shift back to on-trade beverage consumption. In addition, the higher-margin healthier living categories are also expected to perform better in H2, which will be reflected in the split of profitability. We raise our revenue forecasts to reflect the strong momentum, but our profit estimates remain broadly unchanged, due to mix considerations and cost inflation.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/20

109.0

15.8

21.3

6.0

54.4

0.5

09/21

124.3

22.7

30.1

7.5

38.5

0.6

09/22e

134.9

24.1

32.2

8.0

36.0

0.7

09/23e

143.0

26.0

34.3

8.5

33.8

0.7

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

Demand still strong

Demand remains strong, with expected revenue growth of 11% at constant currency for H122, to £66.3m. This has been driven by citrus, where Treatt has grown a number of longstanding relationships with large beverage companies, demonstrating its strong market position. Revenue growth was also strong in both synthetic aroma, and herbs, spices & florals, in part driven by higher demand for protein flavourings. Treatt’s business remains diversified as it continues to win new business with both new and existing customers, and both directly to consumer goods companies and indirectly through flavour and fragrance houses. Crucially, H1 has ended strongly and the momentum has continued into H2, with stronger growth coming from the higher-margin healthier living categories. Margins are therefore expected to be materially stronger during H2.

UK relocation nearing completion

The new UK facility is fully open, and the operational commissioning continues. According to previous guidance, most of the manufacturing will be up and running by mid CY22. Treatt has also invested in substantial inventory holdings (c six months trading), which has helped it to successfully navigate a number of supply chain challenges.

Valuation: Trading at a premium to peers

We note that the current share price is discounting medium-term sales growth of 4.5%, falling to 2.5% in perpetuity, with a WACC of 5.7% and a terminal EBIT margin of 20.0% (vs 17.2% in FY21). Our earnings estimates remain broadly unchanged following the trading update. Treatt trades at 36.0x FY22e P/E and 27.8x FY22e EV/EBITDA. It trades at a c 30% premium to its peer group on a P/E basis and a c 40% premium on EV/EBITDA, though it trades in line with peers if we exclude those that are more exposed to lower-margin commoditised products.

Forecasts

In light of the current trading trends discussed above, we raise our revenue forecasts for FY22–24 as detailed in Exhibit 1. We now believe FY22 revenues are likely to be higher than our previous expectations. We leave our growth assumptions for FY23 and FY24 unchanged, but absolute revenue forecasts increase due to the higher base. As discussed above, we believe margins are likely to be lower than we had previously forecast, and we therefore leave our profit forecasts broadly unchanged.

Exhibit 1: Old versus new key P&L forecasts

£000s

2022e

2023e

2024e

Old

New

Diff

Old

New

Diff

Old

New

Diff

Revenue

131,786

134,894

2.4%

139,693

142,987

2.4%

148,074

151,567

2.4%

Operating profit

22,034

22,014

-0.1%

23,775

23,764

0.0%

25,646

25,644

0.0%

PBT*

22,016

21,993

-0.1%

23,815

23,796

-0.1%

25,738

25,728

0.0%

PBT (pre exceptional) Edison

24,076

24,050

-0.1%

25,994

25,974

-0.1%

28,047

28,037

0.0%

Basic EPS* (p)

28.8

28.8

-0.1%

30.7

30.7

-0.1%

32.7

32.7

0.0%

Basic EPS (pre exceptional) Edison (p)

32.2

32.2

-0.1%

34.3

34.3

-0.1%

36.6

36.6

0.0%

Source: Edison Investment Research. Note: *Stated on an FRS/reported basis.

Valuation

We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 2 below. For 2022, Treatt trades at a c 30% premium to its peer group on a P/E basis, and a c 40% 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 broadly in line with the remaining peers on both P/E and EV/EBITDA. Although it is smaller than its peers, its portfolio of products is increasingly specialised and the company has demonstrated its resilience with a robust performance despite the pandemic.

Exhibit 2: Comparative valuation

Market cap
(m)

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

2022e

2023e

2022e

2023e

2022e

2023e

Givaudan

CHF36,784

39.9

35.7

26.9

24.9

1.7

1.8

IFF

$32,072

22.2

18.8

16.9

15.0

2.5

2.6

Symrise

CHF16,026

37.5

33.3

19.9

18.4

1.0

1.1

Chr Hansen

DKK73,731

42.1

37.4

25.2

23.0

1.5

1.7

Kerry

€18,169

24.6

22.3

17.6

16.2

1.0

1.1

Ingredion

$5,922

12.6

11.4

7.9

7.3

3.0

3.1

Peer group average

29.8

26.5

19.1

17.5

1.8

1.9

Treatt

£691.4

38.2

35.7

27.8

23.8

0.7

0.7

Premium/(discount) to peer group (%)

28.3%

34.9%

45.7%

36.4%

(63.6%)

(63.3%)

Source: Refinitiv, Edison Investment Research. Note: Prices as of 7 April 2022.


Exhibit 3: Financial summary

£000s

2018

2019

2020

2021

2022e

2023e

2024e

Year end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

112,163

112,717

109,016

124,326

134,894

142,987

151,567

Cost of Sales

(84,407)

(84,060)

(77,140)

(82,103)

(89,082)

(93,998)

(99,183)

Gross Profit

27,756

28,657

31,876

42,223

45,812

48,990

52,384

EBITDA

 

 

16,627

15,785

17,862

24,877

28,995

30,951

32,995

Operating Profit (before amort., except and sbp.)

 

 

15,108

14,226

16,053

23,172

24,071

25,941

27,953

Intangible Amortisation

(124)

(90)

(75)

(93)

(79)

(67)

(57)

Share based payments

(1,040)

(637)

(886)

(1,733)

(1,979)

(2,110)

(2,252)

Other

0

0

0

0

0

0

0

Operating Profit

13,944

13,499

15,092

21,346

22,014

23,764

25,644

Net Interest

(1,302)

(199)

(291)

(427)

(21)

33

84

Exceptionals

(1,105)

(755)

(1,060)

(1,302)

0

0

0

Profit Before Tax (norm)

 

 

13,806

14,027

15,762

22,745

24,050

25,974

28,037

Profit Before Tax (FRS 3)

 

 

11,537

12,545

13,741

19,617

21,993

23,796

25,728

Profit Before Tax (company)

 

 

12,642

13,300

14,801

20,919

21,993

23,796

25,728

Tax

(2,284)

(2,673)

(2,896)

(4,469)

(4,698)

(5,354)

(6,046)

Profit After Tax (norm)

11,392

11,263

12,762

18,090

19,352

20,619

21,991

Profit After Tax (FRS 3)

9,253

9,872

10,845

15,148

17,294

18,442

19,682

Discontinued operations

2,976

(1,084)

0

0

0

0

0

Average Number of Shares Outstanding (m)

56.8

59.1

59.8

60.1

60.1

60.1

60.1

EPS - normalised (p)

 

 

20.1

19.0

21.3

30.1

32.2

34.3

36.6

EPS - adjusted (p)

 

 

18.0

17.8

19.7

27.1

28.8

30.7

32.7

EPS - (IFRS) (p)

 

 

16.3

16.7

18.1

25.2

28.8

30.7

32.7

Dividend per share (p)

5.1

5.5

6.0

7.5

8.0

8.5

9.1

Gross Margin (%)

24.7

25.4

29.2

34.0

34.0

34.3

34.6

EBITDA Margin (%)

14.8

14.0

16.4

20.0

21.5

21.6

21.8

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

13.5

12.6

14.7

18.6

17.8

18.1

18.4

Operating Margin (%)

12.4

12.0

13.8

17.2

16.3

16.6

16.9

BALANCE SHEET

Fixed Assets

 

 

21,863

31,730

54,048

65,811

64,776

66,843

69,018

Intangible Assets

752

845

1,358

2,424

2,345

2,278

2,221

Tangible Assets

20,038

29,485

50,159

61,039

61,639

63,774

66,005

Investments

1,073

1,400

2,531

2,348

792

792

792

Current Assets

 

 

102,401

98,158

69,472

83,606

86,748

96,328

111,470

Stocks

39,642

36,799

36,050

47,263

51,011

53,785

56,709

Debtors

28,828

23,020

24,167

26,371

28,478

30,043

31,694

Cash

32,304

37,187

7,739

7,260

7,260

12,499

23,067

Other

1,627

1,152

1,516

2,712

0

0

0

Current Liabilities

 

 

(35,781)

(28,905)

(15,989)

(30,460)

(24,209)

(21,639)

(22,135)

Creditors

(16,479)

(11,784)

(12,640)

(17,620)

(20,987)

(21,496)

(21,992)

Short term borrowings

(19,244)

(16,860)

(3,203)

(12,697)

(3,079)

0

0

Provisions

(58)

(261)

(146)

(143)

(143)

(143)

(143)

Long Term Liabilities

 

 

(6,858)

(13,876)

(16,411)

(11,605)

(11,521)

(9,981)

(9,981)

Long term borrowings

(3,001)

(4,369)

(3,450)

(2,624)

(1,540)

0

0

Other long term liabilities

(3,857)

(9,507)

(12,961)

(8,981)

(9,981)

(9,981)

(9,981)

Net Assets

 

 

81,625

87,107

91,120

107,352

115,794

131,551

148,371

CASH FLOW

Operating Cash Flow

 

 

3,580

20,544

15,677

13,892

26,508

27,119

28,916

Net Interest

(609)

(199)

(191)

(270)

(21)

33

84

Tax

(2,978)

(2,208)

(2,191)

(4,874)

(4,698)

(5,354)

(6,046)

Capex

(6,190)

(10,392)

(23,909)

(13,195)

(5,523)

(7,145)

(7,273)

Acquisitions/disposals

8,357

855

(1,041)

(1,178)

0

0

0

Financing

21,090

622

(69)

(212)

0

0

0

Dividends

(2,876)

(3,080)

(3,378)

(3,704)

(4,509)

(4,795)

(5,113)

Net Cash Flow

20,374

6,142

(15,102)

(9,541)

11,756

9,858

10,567

Opening net debt/(cash)

 

 

10,225

(10,059)

(15,958)

(427)

9,114

(2,641)

(12,499)

HP finance leases initiated

0

0

0

0

0

0

0

Other

(90)

(243)

(429)

(0)

0

0

0

Closing net debt/(cash)

 

 

(10,059)

(15,958)

(427)

9,114

(2,641)

(12,499)

(23,067)

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).

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.

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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NSW 2000, Australia

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Schumannstrasse 34b

60325 Frankfurt

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280 High Holborn

London, WC1V 7EE

United Kingdom

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1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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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 2022 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.

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.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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WANdisco — Multiple contract wins bolster momentum

WANdisco’s (WAND’s) Q122 trading update demonstrated that the momentum we reported on earlier this year has continued, with bookings and remaining performance obligations (RPO) up significantly to $5.8m (+427% y-o-y) and $14m (+233% y-o-y), respectively. Deals were won across a range of industries and use cases, with computer hardware, telecoms, insurance, and IoT and multi-cloud being key. The company’s momentum is in line with our expectation that as WAND continues its transition to a consumption-based model, it should generate more predictable revenues. This is shown by the recent growth in RPO (up 49% from Q421’s $9.4m), which measures deferred revenue plus unbilled committed contractual revenues. Our estimates for FY22 may be conservative, especially if WAND continues to build on its momentum, but we leave our forecasts unchanged pending the FY21 results announcement.

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