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Research: Consumer
Treatt
Written by
Treatt |
New strategy playing out |
Interim results |
Food & beverages |
17 May 2016 |
Share price performance
Business description
Next events
Analysts
Treatt is a research client of Edison Investment Research Limited |
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Treatt has yet again reported a strong set of results. The strategy to improve the quality of earnings is coming through, as proven by these results: the move from commoditised sales to more value-added products has caused sales to be marginally down, and yet margins are up. We leave our forecasts unchanged as we believe the new strategy will continue to play out.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/15 |
85.9 |
8.1 |
12.3 |
4.6 |
14.4 |
2.6 |
09/16e |
85.9 |
8.5 |
12.4 |
4.7 |
14.3 |
2.6 |
09/17e |
89.4 |
9.1 |
13.3 |
5.0 |
13.3 |
2.8 |
09/18e |
92.9 |
9.3 |
13.5 |
5.1 |
13.1 |
2.9 |
Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.
Strong start to the year
H1 sales were 1% ahead of our forecast, and operating profit was in line with our forecasts, but this was despite a net FX loss during H1. This should reverse in H2. We expect a more even balance of profitability between H1 and H2 in 2016 compared to 2015, which witnessed a weak Q1. We therefore leave our FY16 forecasts unchanged at this stage, but see potential for upside given management’s conservative track record and the momentum in the business.
New strategy gives continuity
Treatt outlined its new strategy towards the end of FY15, and it is an evolution from the prior three-year plan, given it is being implemented by the same management team. CEO Daemmon Reeve previously reshaped the business to break down the silo mentality, and the new strategy is now trying to achieve improved customer focus and closer relationships, with the ultimate goal of moving Treatt away from commoditised trading and concentrating its resources further up the value chain to deliver greater profitability.
Valuation: Ingredients space is attractive
We have rolled forward our DCF to start in 2017. Our DCF-derived fair value therefore increases to 204p, an attractive 15% upside to the current share price. This is also supported by a benchmark valuation, with Treatt trading at 14.1x and 9.0x calendar P/E and EV/EBITDA respectively for 2016e, representing a +40% discount to the ingredients peer group. With more evidence of Treatt moving up the value chain and away from commoditised product trading, we believe the valuation gap should start to tighten. Given our forecast for mid-single-digit three-year CAGR EPS 2016-19, we think the current level of discount is unwarranted, and believe Treatt presents an interesting opportunity to gain exposure to the highly-rated food ingredients segment.
H1 results
H1 sales were down c 1%, caused by a change in product mix as the company tries to move away from commoditised trading. The prior three-year strategic plan was delivered in full and ahead of time, and towards the end of FY15, Treatt started to implement the new strategy. This is an evolution of the old strategy and is described in greater detail in our latest note. The main objective is to collaborate ever more closely with its customers, in order to deliver superior solutions and become the supplier of choice, thus leading to long-term, sustainable profit growth. The new strategy is progressing well, and there have been a number of new business wins, which over time should lead to greater profitability.
Profits were held back in H1 by the timing of FX hedges. These are of a long-term nature and should unwind in H2.
As normal, Treatt has reported an increase in net debt at the end of H1 as inventory is built up in preparation for the seasonally stronger second half of the year (though we expect the split between H1 and H2 to be less pronounced in 2016 than in 2015 when Treatt experienced a particularly weak Q1). In addition, some citrus raw material prices rose markedly during H1, thus increasing inventory by £3.9m vs H115. Nevertheless net debt was down £1.5m vs a year ago.
Valuation
We illustrate Treatt’s valuation versus its ingredients peer group below. Treatt trades at a significant discount to its ingredients peer group on all metrics. While some discount can be applied given its small size, and some of its products are relatively ‘upstream’ in the ingredients spectrum – in particular the bulk ingredients that are sold to other ingredients companies, which we estimate account for c 30% of revenue – and hence would command a lower multiple, we believe a c 40% discount on EV/EBITDA and P/E is unwarranted.
Exhibit 1: Benchmark valuation
P/E (x) |
EV/EBITDA (x) |
Dividend yield (%) |
|||||
Market cap (m) |
2016 |
2017 |
2016 |
2017 |
2016 |
2017 |
|
Givaudan |
CHF17,544 |
24.9 |
23.2 |
16.3 |
15.4 |
3.1% |
3.3% |
IFF |
$9,450 |
21.7 |
20.0 |
14.3 |
13.3 |
1.9% |
2.0% |
Symrise |
CHF8,386 |
25.1 |
22.9 |
14.4 |
13.2 |
1.5% |
1.7% |
Frutarom |
ILS11,079 |
21.0 |
18.9 |
14.8 |
12.8 |
0.8% |
1.0% |
Chr Hansen |
DKK53,769 |
37.8 |
32.8 |
24.4 |
21.4 |
1.3% |
1.6% |
Kerry |
€13,594 |
23.7 |
21.2 |
17.0 |
15.1 |
0.7% |
0.8% |
Ingredion |
$8,170 |
17.0 |
15.7 |
9.4 |
8.8 |
1.7% |
1.8% |
Peer group average |
24.5 |
22.1 |
15.8 |
14.3 |
1.6% |
1.7% |
|
Treatt |
£94.1 |
14.1 |
13.3 |
9.0 |
8.4 |
2.7% |
2.8% |
Premium/(discount) to peer group (%) |
-40.9% |
-42.5% |
-39.9% |
-42.8% |
-41.4% |
72.4% |
|
Source: Bloomberg (prices as of 16 May 2016). Note: Treatt figures are calendarised to aid comparison.
We have rolled forward our DCF to start in 2017, given we have now passed the H1 mark. Our DCF-derived fair moves to 204p. This is predicated on a WACC of 7.9% (encompassing a beta of 0.8, an equity risk premium of 5.0% and a borrowing spread of 5.0%) and a terminal growth rate of 2%.
Exhibit 2: Financial summary
£000s |
2013 |
2014 |
2015 |
2016e |
2017e |
2018e |
||
Year end September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
74,097 |
79,189 |
85,934 |
85,934 |
89,371 |
92,946 |
Cost of Sales |
(56,510) |
(61,218) |
(66,955) |
(66,654) |
(68,874) |
(71,536) |
||
Gross Profit |
17,587 |
17,971 |
18,979 |
19,280 |
20,498 |
21,411 |
||
EBITDA |
|
|
8,338 |
9,022 |
10,109 |
10,574 |
11,526 |
12,167 |
Operating Profit (before amort. and except.) |
|
|
7,119 |
7,800 |
8,865 |
9,142 |
10,037 |
10,618 |
Intangible Amortisation |
(181) |
(172) |
(175) |
(160) |
(160) |
(160) |
||
Exceptionals |
(1,153) |
(1,402) |
(174) |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
5,785 |
6,226 |
8,516 |
8,982 |
9,877 |
10,458 |
||
Net Interest |
(651) |
(724) |
(740) |
(652) |
(918) |
(1,340) |
||
Profit Before Tax (norm) |
|
|
6,468 |
7,076 |
8,125 |
8,490 |
9,119 |
9,278 |
Profit Before Tax (FRS 3) |
|
|
5,134 |
5,502 |
7,776 |
8,330 |
8,959 |
9,118 |
Tax |
(1,655) |
(1,553) |
(1,786) |
(2,082) |
(2,240) |
(2,280) |
||
Profit After Tax (norm) |
4,813 |
5,280 |
6,339 |
6,407 |
6,879 |
6,999 |
||
Profit After Tax (FRS 3) |
3,479 |
3,949 |
5,990 |
6,247 |
6,719 |
6,839 |
||
Average Number of Shares Outstanding (m) |
51.1 |
51.3 |
51.5 |
51.7 |
51.7 |
51.7 |
||
EPS - normalised (p) |
|
|
9.4 |
10.3 |
12.3 |
12.4 |
13.3 |
13.5 |
EPS - normalised & fully diluted (p) |
|
|
9.4 |
10.2 |
12.2 |
12.4 |
13.3 |
13.5 |
EPS - (IFRS) (p) |
|
|
6.8 |
7.7 |
11.6 |
12.1 |
13.0 |
13.2 |
Dividend per share (p) |
3.7 |
3.8 |
4.6 |
4.7 |
5.0 |
5.1 |
||
Gross Margin (%) |
23.7 |
22.7 |
22.1 |
22.4 |
22.9 |
23.0 |
||
EBITDA Margin (%) |
11.3 |
11.4 |
11.8 |
12.3 |
12.9 |
13.1 |
||
Operating Margin (before GW and except.) (%) |
9.6 |
9.8 |
10.3 |
10.6 |
11.2 |
11.4 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
14,341 |
13,777 |
13,381 |
16,578 |
26,269 |
32,454 |
Intangible Assets |
1,759 |
1,801 |
1,736 |
1,576 |
1,416 |
1,256 |
||
Tangible Assets |
11,718 |
10,994 |
10,998 |
14,355 |
24,206 |
30,551 |
||
Investments |
864 |
982 |
647 |
647 |
647 |
647 |
||
Current Assets |
|
|
38,340 |
43,590 |
45,045 |
44,775 |
46,903 |
49,131 |
Stocks |
23,669 |
28,020 |
25,799 |
26,640 |
28,063 |
29,557 |
||
Debtors |
13,207 |
14,509 |
17,635 |
17,635 |
18,340 |
19,074 |
||
Cash |
1,117 |
629 |
1,477 |
500 |
500 |
500 |
||
Other |
347 |
432 |
134 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(12,533) |
(16,005) |
(13,481) |
(15,866) |
(21,166) |
(24,242) |
Creditors |
(11,962) |
(12,729) |
(12,675) |
(11,812) |
(12,285) |
(12,776) |
||
Short term borrowings |
(522) |
(2,356) |
(567) |
(4,054) |
(8,881) |
(11,466) |
||
Provisions |
(49) |
(920) |
(239) |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(12,754) |
(12,602) |
(11,760) |
(6,823) |
(9,036) |
(10,129) |
Long term borrowings |
(8,889) |
(7,857) |
(7,065) |
(2,027) |
(4,440) |
(5,733) |
||
Other long term liabilities |
(3,865) |
(4,745) |
(4,695) |
(4,796) |
(4,596) |
(4,396) |
||
Net Assets |
|
|
27,394 |
28,760 |
33,185 |
38,663 |
42,970 |
47,214 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
9,250 |
3,528 |
8,667 |
10,461 |
9,670 |
10,230 |
Net Interest |
(714) |
(724) |
(740) |
(652) |
(918) |
(1,340) |
||
Tax |
(649) |
(1,552) |
(1,469) |
(2,082) |
(2,240) |
(2,280) |
||
Capex |
(1,433) |
(538) |
(924) |
(4,789) |
(11,341) |
(7,894) |
||
Acquisitions/disposals |
(154) |
(208) |
(103) |
0 |
0 |
0 |
||
Financing |
(56) |
105 |
147 |
(0) |
0 |
0 |
||
Dividends |
(1,585) |
(1,899) |
(1,978) |
(2,363) |
(2,412) |
(2,594) |
||
Net Cash Flow |
4,659 |
(1,288) |
3,600 |
574 |
(7,240) |
(3,877) |
||
Opening net debt/(cash) |
|
|
12,949 |
8,294 |
9,584 |
6,155 |
5,581 |
12,821 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
(4) |
(2) |
(171) |
0 |
(0) |
(0) |
||
Closing net debt/(cash) |
|
|
8,294 |
9,584 |
6,155 |
5,581 |
12,821 |
16,698 |
Source: Edison Investment Research, Treatt accounts
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