Treatt — Update 30 November 2016

Treatt (LSE: TET)

Last close As at 10/10/2024

420.00

2.00 (0.48%)

Market capitalisation

257m

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Research: Consumer

Treatt — Update 30 November 2016

Treatt

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Consumer

Treatt

Staying sweet

FY16 results

Food & beverages

30 November 2016

Price

258.0p

Market cap

£134m

Net debt (£m) as at 30 September

1.7

Shares in issue

52.1m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

NA

Share price performance

%

1m

3m

12m

Abs

18.6

41.4

58.3

Rel (local)

22.0

43.0

50.0

52-week high/low

267.00p

161.00p

Business description

Treatt provides innovative ingredient solutions from its manufacturing bases in Europe, North America and Africa, principally for the flavours and fragrance industries and multinational consumer goods companies with particular emphasis on the beverage sector.

Next events

H1 17 trading statement

March 2017

H1 17 results

9 May 2017

Analysts

Sara Welford

+44 (0) 20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Treatt is a research client of Edison Investment Research Limited

Results have yet again beaten our forecasts and the management has now delivered the fourth consecutive year of earnings above expectations. The share price is up 41% over the last three months, and Treatt is steadily moving from commoditised sales to more value-added products. Its strategy of deep customer relationships is paying off, giving it a real competitive advantage and improving margins. The year finished strongly and momentum is due to continue in the traditionally seasonally weaker Q117. Our P&L forecasts are broadly maintained, but our fair value moves to 272p (from 240p) as a result of stronger cash flow.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/15

85.9

8.3

12.7

4.0

20.8

1.5

09/16

88.0

9.6

14.3

4.4

18.5

1.6

09/17e

92.4

10.3

15.2

4.6

17.4

1.7

09/18e

96.1

10.6

15.7

4.7

16.8

1.8

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

From strength to strength

FY16 sales were in line and operating profit was 3% above our forecasts, but this was despite a net FX loss during the year. We expect the strong momentum from Q4 to continue into Q1 (which is usually seasonally weaker) and contribute towards further margin improvement. We leave our forecasts broadly unchanged, but see potential for upside given management’s conservative track record.

Clear focus

Treatt outlined its new strategy towards the end of FY15, and it was an evolution from the previous three-year plan, being implemented by the same management team. CEO Daemmon Reeve previously reshaped the business to break down the silo mentality, and the goal now is to achieve improved customer focus and closer relationships, with the ultimate aim of moving Treatt away from commoditised trading and concentrating its resources further up the value chain to deliver greater profitability. The results so far are clear, as the business continues to go from strength to strength.

Valuation: Attractive ingredients play

We value Treatt using a DCF model and we derive a fair value of 272p (previously 240p), or c 4% upside to the current share price. The increase in fair value reflects a combination of stronger than expected cash flow and our assumption of slightly lower working capital outflows in future years; albeit allowing for relatively high levels of inventory, which act as a buffer against commodity price movements. Given the relatively high level of working capital, the DCF valuation is sensitive to small movements in our forecast. On a relative valuation, Treatt trades at 17.2x and 11.9x calendar P/E and EV/EBITDA multiples for 2017, representing a c 20% discount to its ingredients peer group on both metrics.

FY16 results

FY sales were up 2.5%, profit before tax was up 11% on an adjusted basis, and adjusted diluted EPS was up 7%. The drive towards higher value-added products helped improve gross margins, and this continues to be an area of focus for the group. Strategically, 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 group has invested in innovation and staff development, and more recently on growing its activities in China, where it sees great potential and hence has increased its capabilities. Net debt continued to fall and stood at £1.7m at the end of FY16. It is likely to increase from here once the UK site relocation goes ahead.

UK site relocation

As announced with the H115 results, Treatt has decided to fully relocate its UK head office and manufacturing plant in the Bury St Edmunds area to a new site nearby. Discussions with landowners are at an advanced stage, and we expect an update within the next few months. We previously forecast £20m total spend on this project, with the majority of the costs in FY17 and FY18. We have now increased this to £28m in total. Part of the increase is due to the expectation that new technologies will be incorporated into the new facility, but there is also an increase due to effectively deferred capex. The company has now guided towards a £3-5m outflow due to capital projects that have been held back over the last three years and that will be implemented once the relocation occurs. Indeed FY16 capex stood at particularly low levels (£0.7m) and reflects the fact that management has sensibly reduced capital expenditure to the minimum possible in view of the imminent relocation.

Valuation

We illustrate Treatt’s valuation versus its ingredients peer group in Exhibit 1 below. Treatt trades at a discount to its ingredients peer group on all metrics.

Exhibit 1: Benchmark valuation

Market cap
(m)

P/E (x)

EV/EBITDA (x)

Dividend yield (%)

2017e

2018e

2017e

2018e

2016e

2017e

Givaudan

CHF18,107

23.6

22.4

15.7

14.9

2.9%

3.2%

IFF

$10,938

22.7

20.3

14.9

13.7

1.7%

1.9%

Symrise

CHF9,145

25.5

23.4

14.3

13.0

1.3%

1.5%

Frutarom

NIS11,705

20.2

18.9

13.9

12.1

0.6%

0.7%

Chr Hansen

DKK51,040

31.5

27.9

20.7

18.7

1.3%

1.5%

Kerry

€12,264

19.6

17.5

14.0

12.2

0.8%

0.9%

Ingredion

$9,580

18.0

16.7

9.7

9.0

1.4%

1.5%

Peer group average

23.0

21.0

14.8

13.4

1.4%

1.6%

Treatt

£136.1

17.2

16.7

11.9

11.3

1.7%

1.8%

Premium/(discount) to peer group (%)

-25.2%

-20.3%

-19.2%

-15.5%

15.9%

9.6%

Source: Bloomberg (prices as of 28 November 2016). Note: Treatt figures are calendarised to aid comparison.

Our DCF-derived fair value moves to 272p (from 240p). This is predicated on a WACC of 8.0% (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%. The increase in fair value is due to stronger than expected cash flow resulting in lower net debt in FY16, and the improved cash flow feeding through into our forecasts and hence slightly lower working capital outflows in future years. The business will still operate with relatively high levels of inventory to guarantee supply and protect itself from commodity price movements, but we see some scope for a small improvement in the metrics.

Exhibit 2: Financial summary

£000s

2013

2014

2015

2016

2017e

2018e

Year-end September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

74,097

79,189

85,934

88,040

92,442

96,140

Cost of Sales

(56,510)

(61,218)

(66,955)

(67,639)

(72,403)

(75,203)

Gross Profit

17,587

17,971

18,979

20,401

20,039

20,937

EBITDA

 

 

8,360

9,068

10,307

11,604

12,421

13,098

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

 

 

7,141

7,846

9,063

10,257

10,880

11,496

Intangible Amortisation

(181)

(172)

(175)

(142)

(160)

(160)

Share based payments

(22)

(46)

(198)

(566)

(652)

(673)

Other

0

0

0

0

0

0

Operating Profit

6,938

7,628

8,690

9,549

10,068

10,663

Net Interest

(651)

(724)

(740)

(703)

(559)

(851)

Exceptionals

(1,153)

(1,402)

(174)

(553)

0

0

Profit Before Tax (norm)

 

 

6,490

7,122

8,323

9,554

10,321

10,645

Profit Before Tax (FRS 3)

 

 

5,134

5,502

7,776

8,293

9,509

9,812

Profit Before Tax (company)

 

 

6,287

6,904

7,950

8,846

9,509

9,812

Tax

(1,655)

(1,553)

(1,786)

(2,144)

(2,425)

(2,502)

Profit After Tax (norm)

4,835

5,326

6,537

7,410

7,896

8,143

Profit After Tax (FRS 3)

3,479

3,949

5,990

6,149

7,084

7,310

Average Number of Shares Outstanding (m)

51.1

51.3

51.5

51.9

51.9

51.9

EPS - normalised (p)

 

 

9.5

10.4

12.7

14.3

15.2

15.7

EPS - normalised & fully diluted (p)

 

 

9.4

10.3

12.6

14.1

15.0

15.5

EPS - (IFRS) (p)

 

 

6.8

7.7

11.6

11.8

13.7

14.1

Dividend per share (p)

3.7

3.8

4.0

4.4

4.6

4.7

Gross Margin (%)

23.7

22.7

22.1

23.2

21.7

21.8

EBITDA Margin (%)

11.3

11.5

12.0

13.2

13.4

13.6

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

9.6

9.9

10.5

11.7

11.8

12.0

BALANCE SHEET

Fixed Assets

 

 

14,341

13,777

13,381

16,161

22,347

40,027

Intangible Assets

1,759

1,801

1,736

3,364

3,204

3,044

Tangible Assets

11,718

10,994

10,998

11,361

17,707

35,547

Investments

864

982

647

1,436

1,436

1,436

Current Assets

 

 

38,340

43,590

45,045

54,435

49,626

50,437

Stocks

23,669

28,020

25,799

29,990

30,565

30,826

Debtors

13,207

14,509

17,635

17,853

18,561

19,111

Cash

1,117

629

1,477

6,588

500

500

Other

347

432

134

4

0

0

Current Liabilities

 

 

(12,533)

(16,005)

(13,481)

(16,388)

(17,405)

(26,337)

Creditors

(11,962)

(12,729)

(12,675)

(15,834)

(15,223)

(15,832)

Short term borrowings

(522)

(2,356)

(567)

(487)

(2,182)

(10,506)

Provisions

(49)

(920)

(239)

(67)

0

0

Long Term Liabilities

 

 

(12,754)

(12,602)

(11,760)

(17,021)

(10,403)

(14,365)

Long term borrowings

(8,889)

(7,857)

(7,065)

(7,755)

(1,091)

(5,253)

Other long term liabilities

(3,865)

(4,745)

(4,695)

(9,266)

(9,312)

(9,112)

Net Assets

 

 

27,394

28,760

33,185

37,187

44,165

49,762

CASH FLOW

Operating Cash Flow

 

 

9,250

3,528

8,667

10,804

12,010

12,696

Net Interest

(714)

(724)

(740)

(703)

(559)

(851)

Tax

(649)

(1,552)

(1,469)

(2,022)

(2,425)

(2,502)

Capex

(1,433)

(538)

(924)

(679)

(7,887)

(19,442)

Acquisitions/disposals

(154)

(208)

(103)

(861)

0

0

Financing

(56)

105

147

280

0

0

Dividends

(1,585)

(1,899)

(1,978)

(2,095)

(2,257)

(2,386)

Net Cash Flow

4,659

(1,288)

3,600

4,724

(1,118)

(12,486)

Opening net debt/(cash)

 

 

12,949

8,294

9,584

6,155

1,654

2,773

HP finance leases initiated

0

0

0

0

0

0

Other

(4)

(2)

(171)

(223)

(1)0

0

Closing net debt/(cash)

 

 

8,294

9,584

6,155

1,654

2,773

15,259

Source: Edison Investment Research, Treatt data


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Germany

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United Kingdom

New York +1 646 653 7026

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US

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88 Phillip St, Sydney

NSW 2000, Australia

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Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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