Treatt — Strong revenue growth, profit in line

Treatt (LSE: TET)

Last close As at 21/05/2024

420.00

2.00 (0.48%)

Market capitalisation

257m

More on this equity

Research: Consumer

Treatt — Strong revenue growth, profit in line

After the usual slower start to the year, Treatt has had a strong Q2; H123 sales growth was 8.5% at constant currency. Momentum is expected to continue into H2, with current sales growth mainly skewed to price as Treatt continues to recover increased costs, though there was also a small contribution from an improvement in mix. Citrus continued to perform strongly as Treatt pursues its strategy of moving away from the lower-margin products. We raise our FY23 sales forecasts to reflect the strong revenue growth but leave our profit forecasts broadly unchanged at this stage, though we see upside risk to forecasts.

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Consumer

Treatt

Strong revenue growth, profit in line

H123 trading update

Food and beverages

17 April 2023

Price

652p

Market cap

£393m

Approximate net debt (£m) at 31 March 2023

17.7

Shares in issue

60.3m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

22.3

(0.9)

(40.0)

Rel (local)

19.2

(0.6)

(40.6)

52-week high/low

1,086.0p

507.0p

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

H123 results

9 May 2023

Trading update

October 2023

FY23 results

28 November 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

After the usual slower start to the year, Treatt has had a strong Q2; H123 sales growth was 8.5% at constant currency. Momentum is expected to continue into H2, with current sales growth mainly skewed to price as Treatt continues to recover increased costs, though there was also a small contribution from an improvement in mix. Citrus continued to perform strongly as Treatt pursues its strategy of moving away from the lower-margin products. We raise our FY23 sales forecasts to reflect the strong revenue growth but leave our profit forecasts broadly unchanged at this stage, though we see upside risk to forecasts.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/21

124.3

22.7

30.1

7.5

21.7

1.2

09/22

140.2

16.5

21.9

7.9

29.7

1.2

09/23e

154.2

18.0

23.6

8.5

27.7

1.3

09/24e

163.5

20.4

26.4

9.6

24.7

1.5

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

Demand is resilient

Treatt continues to win business with new and existing customers and both through direct sales and indirectly through flavour and fragrance houses. H123 sales were £75.9m, up 15% versus the prior year and up 8.5% at constant currency. Coffee and China performed well, as did Fruit & Vegetables. Health & Wellness and Tea were broadly flat versus the previous year, with Synthetic Aromas somewhat in decline due to destocking, with anticipated normalisation of volumes in H2. Adjusted PBT was c £7.1m, up 12% on the prior year. Strong cost discipline and other self-help measures continue to be implemented, with the group headcount reduced by 6% since September 2022 as efficiencies from the new facilities start to come through.

Cash management is strong

Net debt is c £17.7m versus £22.4m at end-FY22 despite the normal seasonal build of working capital during H1. Inventory was down an impressive c £7m during H1 despite the record high orange oil prices and maintaining strategic inventory. Further reduction in inventory is expected during H2. Progress on foreign exchange hedging controls is validated by a net loss of £0.2m in H123 versus £0.6m in H122.

Valuation: Profit estimates broadly unchanged

The current share price is discounting medium-term sales growth of 4.5%, 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 profit estimates remain broadly unchanged following the announcement. We note that H2 is the bigger half year for Treatt, as it is a more summer-weighted business owing to its exposure to beverages in the northern hemisphere. Treatt trades at 27.7x FY23e P/E and 17.1x FY23e EV/EBITDA. On both P/E and EV/EBITDA multiples, it trades at a c 5–10% premium to its peer group, although it trades at a c 5% discount to 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 FY23–25 as detailed in Exhibit 1. We leave our growth assumptions unchanged for FY24 and FY25, but absolute revenue forecasts increase due to the higher base. We believe margins are likely to be lower than we had previously forecast, given high orange oil prices, and we therefore leave our profit forecasts broadly unchanged.

Exhibit 1: Old versus new key P&L forecasts

£000s

2023e

2024e

2025e

Old

New

Diff

Old

New

Diff

Old

New

Diff

Revenue

148,596

154,204

4%

157,512

163,456

4%

165,387

171,628

4%

Operating profit

17,760

17,813

0%

19,455

19,536

0%

20,759

20,856

0%

PBT*

16,722

16,775

0%

19,009

19,089

0%

20,560

20,657

0%

PBT (pre exceptional) Edison

17,916

17,972

0%

20,299

20,384

0%

21,919

22,022

0%

Basic EPS* (p)

21.5

21.6

1%

24.1

24.2

1%

26.0

26.2

1%

Basic EPS (pre exceptional) Edison (p)

23.4

23.6

1%

26.2

26.4

1%

28.3

28.5

1%

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. Treatt trades at a c 10% premium to its peer group on a P/E basis, and at a small 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 c 5% discount to the remaining peers on both P/E and EV/EBITDA multiples. Although it is smaller than its peers, its portfolio of products is increasingly specialised.

Exhibit 2: Comparative valuation

Market cap
(m)

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

2023e

2024e

2023e

2024e

2023e

2024e

Givaudan

CHF28,658

30.8

27.5

21.6

19.8

2.3

2.4

IFF

$24,145

19.3

16.6

14.8

13.3

3.2

3.3

Symrise

CHF14,714

31.6

27.5

17.3

15.7

1.1

1.2

Chr Hansen

DKK67,818

35.8

32.0

21.5

19.7

1.8

2.1

Kerry

€17,128

21.4

19.1

15.6

14.3

1.2

1.3

Ingredion

$6,932

12.8

11.6

8.3

7.7

2.8

2.9

Peer group average

25.3

22.4

16.5

15.1

2.1

2.2

Treatt

£393

27.7

24.7

17.1

16.0

1.3

1.5

Premium/(discount) to peer group (%)

9.4%

10.4%

3.8%

6.3%

(36.3%)

(32.9%)

Source: Refinitiv, Edison Investment Research. Note: Prices as of 14 April 2023.

Exhibit 3: Financial summary

£000s

2020

2021

2022

2023e

2024e

2025e

Year end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

109,016

124,326

140,185

154,204

163,456

171,628

Cost of Sales

(77,140)

(82,103)

(101,101)

(110,286)

(115,759)

(120,345)

Gross Profit

31,876

42,223

39,084

43,918

47,697

51,283

EBITDA

 

 

17,862

24,877

19,503

24,255

25,917

27,553

Operating profit (before amort. and excepts.)

 

 

16,053

23,172

17,027

19,010

20,830

22,221

Intangible Amortisation

(75)

(93)

(215)

(183)

(155)

(132)

Share based payments

(886)

(1,733)

(1,039)

(1,014)

(1,140)

(1,233)

Other

0

0

0

0

0

0

Operating Profit

15,092

21,346

15,773

17,813

19,536

20,856

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

17,972

20,384

22,022

Profit Before Tax (FRS 3)

 

 

13,741

19,617

16,179

16,775

19,089

20,657

Profit Before Tax (company)

 

 

14,801

20,919

15,256

16,775

19,089

20,657

Tax

(2,896)

(4,469)

(2,864)

(3,774)

(4,486)

(4,854)

Profit After Tax (norm)

12,762

18,090

13,215

14,198

15,898

17,168

Profit After Tax (FRS 3)

10,845

15,148

13,315

13,001

14,603

15,802

Discontinued operations

0

0

0

0

0

0

Average Number of Shares Outstanding (m)

59.8

60.1

60.4

60.3

60.3

60.3

EPS - normalised (p)

 

 

21.3

30.1

21.9

23.6

26.4

28.5

EPS - adjusted (p)

 

 

19.7

27.1

25.3

21.6

24.2

26.2

EPS - (IFRS) (p)

 

 

18.1

25.2

22.0

21.6

24.2

26.2

Dividend per share (p)

6.0

7.5

7.9

8.5

9.6

10.4

Gross Margin (%)

29.2

34.0

27.9

28.5

29.2

29.9

EBITDA Margin (%)

16.4

20.0

13.9

15.7

15.9

16.1

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

14.7

18.6

12.1

12.3

12.7

12.9

Operating Margin (%)

13.8

17.2

11.3

11.6

12.0

12.2

BALANCE SHEET

Fixed Assets

 

 

54,048

65,811

79,644

81,143

82,353

83,822

Intangible Assets

1,358

2,424

3,206

3,023

2,868

2,736

Tangible Assets

50,159

61,039

74,281

78,120

79,485

81,086

Investments

2,531

2,348

2,157

0

0

0

Current Assets

 

 

69,472

83,606

108,537

99,965

104,841

109,107

Stocks

36,050

47,263

68,351

63,686

67,017

70,024

Debtors

24,167

26,371

37,113

33,925

35,470

36,728

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)

(30,508)

(27,775)

(24,313)

Creditors

(12,640)

(17,620)

(23,792)

(20,164)

(20,994)

(21,656)

Short term borrowings

(3,203)

(12,697)

(22,035)

(9,947)

(6,384)

(2,260)

Provisions

(146)

(143)

(397)

(397)

(397)

(397)

Long Term Liabilities

 

 

(16,411)

(11,605)

(7,711)

(11,342)

(9,561)

(7,499)

Long term borrowings

(3,450)

(2,624)

(2,342)

(4,973)

(3,192)

(1,130)

Other long term liabilities

(12,961)

(8,981)

(5,369)

(6,369)

(6,369)

(6,369)

Net Assets

 

 

91,120

107,352

134,246

139,258

149,858

161,117

CASH FLOW

Operating Cash Flow

 

 

15,677

13,442

(1,830)

28,481

21,871

23,948

Net Interest

(191)

(270)

(382)

(1,038)

(446)

(199)

Tax

(2,191)

(4,874)

443

(3,774)

(4,486)

(4,854)

Capex

(23,909)

(13,195)

(11,849)

(9,084)

(6,452)

(6,933)

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)

(4,731)

(5,143)

(5,777)

Net Cash Flow

(15,102)

(9,541)

(13,305)

9,853

5,344

6,186

Opening net debt/(cash)

 

 

(15,958)

(427)

9,114

22,419

12,566

7,222

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

12,566

7,222

1,036

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).

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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.

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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