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Currency in GBP
Last close As at 07/06/2023
GBP6.98
▲ −15.00 (−2.10%)
Market capitalisation
GBP421m
Research: Consumer
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.
Treatt |
Strong revenue growth, profit in line |
H123 trading update |
Food and beverages |
17 April 2023 |
Share price performance
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
Analysts
Treatt is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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 |
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
|
|
Research: Financials
JDC Group (JDC) reported FY22 results that were in line with the preliminary results published on 9 March. After slower than expected growth in H222, JDC expects 2023 revenue growth to accelerate again to 17% at the midpoint of guidance and the EBITDA margin to improve. Nevertheless, we have lowered our 2023 and 2024 revenue estimates by 5% and 6% and our EBITDA estimates by 7% and 12%, respectively, due to a lower FY22 base. JDC trades at an FY24e EV/EBITDA multiple of 12.0x on consensus estimates, which we believe is very undemanding for what is essentially a fast-scaling platform business. Our DCF calculation provides a valuation of €32.51/share (versus €36.40/share previously).
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