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GBP436m
Research: Consumer
Treatt
Treatt |
Keep Treat(t)ing |
Trading statement |
Food & beverages |
27 February 2017 |
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 beaten expectations by delivering an exceptionally strong start to FY17 despite Q1 typically being a seasonally weak quarter. The success is across the board and has led to a surprise trading statement (23 February). We upgrade our forecasts to reflect the strong sales growth and also the margin improvement as Treatt moves further up the value chain. Our fair value increases to 350p (from 293p) as a result.
Year |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/16 |
88.0 |
9.6 |
14.3 |
4.4 |
22.3 |
1.4 |
09/17e |
99.5 |
12.5 |
18.4 |
5.6 |
17.3 |
1.8 |
09/18e |
107.4 |
13.7 |
20.1 |
6.1 |
15.8 |
1.9 |
09/19e |
111.7 |
14.1 |
20.8 |
6.3 |
15.3 |
2.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Strategy continues to deliver
Treatt’s long-term strategy is to deliver consistent, sustainable growth in profit through developing value-added ingredient solutions, coupled with effective cost control. Key to this strategy is improved customer focus and closer relationships, with the ultimate goal of delivering greater profitability by concentrating on the more value-added segments. This goal has been delivered consistently over the past few years, with results often beating expectations. As a result of the trading update, we yet again upgrade our full-year forecasts for 2017-19 to reflect the improved outlook. Our sales forecasts move up c 10%, while PBT and EPS increase by c 20-30%, as Treatt’s move up the value chain should deliver a strong improvement in margins.
Ingredients remain an attractive space
Growth in the ingredients space remains higher than average for the consumer sector as consumers demand cleaner labels and healthier products, but will not compromise on taste; this requires specialist ingredients. Margins are also typically high at the value-added end, as the ingredients deliver key attributes to the end products. Treatt’s ingredient solutions are used both by food ingredients companies in their formulations, and by food and beverages companies directly. Treatt has placed particular emphasis on beverages and is becoming increasingly specialised in this space, with tea a specific area of growth.
Valuation: An attractive ingredients play
Our DCF-derived fair value is 350p (previously 293p), an attractive c 12% upside to the current share price. This is supported by its benchmark valuation, with Treatt trading at 16.7x CY17e P/E and 11.8x CY17e EV/EBITDA. This represents a c 30% and c 23% discount, respectively, to its ingredients peer group. Given our outlook for the business and its strong track record, we believe this level of discount is unwarranted.
Business update
Treatt has witnessed strength across the board. All key product categories have been performing well in H117, with citrus and sugar reduction solutions being particularly successful. The group has also seen strong growth in the personal care space (the Earthoil division). Order books are in very good shape for the rest of FY17 but also looking out to FY18.
Revenue growth has been particularly strong as it is currently estimated to be up over 20% during H117. This comes as a result of both new business wins and growth with existing customers, which is very encouraging. Margins continue to improve as the company moves up the value chain and delivers more enhanced solutions to its customers.
Higher raw material costs and a bulging order book have had an impact on working capital, and hence net debt is now expected to be £10-12m at the end of H117 (vs £8.4m at H116). As a reminder, Treatt typically has a seasonal cash outflow in H1 that then reverses in H2, hence FY17 net debt is still expected to fall significantly vs H117. We forecast net debt of £2.0m at end FY17.
Forecast revisions
We detail our key changes to P&L forecasts in Exhibit 1 below. We have upgraded our FY17 forecasts to reflect the extremely positive start to the year, and we have also increased our forecasts for future years as Treatt is accelerating its move up the value chain, and order books for the remainder of FY17 and for FY18 are materially up. Improved sales growth should lead to operating leverage, and the move towards value-added products should also be beneficial to margins. We have increased our pre-tax profit and EPS forecasts by c 20-30%.
Exhibit 1: P&L forecast changes
EPS (p)* |
PBT (£000s)* |
Sales (£000s) |
|||||||
Old |
New |
% chg |
Old |
New |
% chg |
Old |
New |
% chg |
|
2017e |
13.7 |
16.5 |
21.2% |
9,509 |
11,525 |
21.2% |
92,442 |
99,485 |
7.6% |
2018e |
14.1 |
18.1 |
28.7% |
9,812 |
12,629 |
28.7% |
96,140 |
107,444 |
11.8% |
2019e |
14.4 |
18.8 |
30.7% |
9,998 |
13,063 |
30.7% |
99,985 |
111,742 |
11.8% |
Source: Edison Investment Research. Note: *EPS and PBT are stated on a company normalised basis, which is pre-exceptional but after amortisation of acquired intangibles and share-based payments (IFRS).
Valuation update
We illustrate Treatt’s valuation versus its ingredients peer group in Exhibit 2 below. Treatt trades at a significant discount to its peer group on all metrics. Some discount can be applied to reflect its small size and because some of its products are relatively ‘upstream’ in the ingredients spectrum, particularly the bulk ingredients that are sold to other ingredients companies. However, we believe a c 30% discount on P/E and c 23% discount on EV/EBITDA is unwarranted.
Exhibit 2: Benchmark valuation
Market cap (m) |
P/E (x) |
EV/EBITDA (x) |
Dividend yield (%) |
||||
2017e |
2018e |
2017e |
2018e |
2017e |
2018e |
||
Givaudan |
CHF16,814 |
23.6 |
22.0 |
15.7 |
14.7 |
3.2% |
3.5% |
IFF |
$9,740 |
21.0 |
19.4 |
14.3 |
13.1 |
2.1% |
2.3% |
Symrise |
CHF8,048 |
25.9 |
23.4 |
14.6 |
13.2 |
1.5% |
1.6% |
Frutarom |
ILS12,153 |
26.8 |
21.6 |
17.2 |
14.7 |
0.5% |
0.6% |
Chr Hansen |
DKK55,338 |
33.7 |
30.0 |
21.8 |
19.7 |
1.5% |
2.0% |
Kerry |
€12,780 |
20.9 |
18.9 |
14.9 |
13.4 |
0.8% |
0.9% |
Ingredion |
$8,659 |
15.9 |
14.9 |
8.9 |
8.3 |
1.7% |
1.8% |
Peer group average |
24.0 |
21.5 |
15.4 |
13.9 |
1.6% |
1.8% |
|
Treatt |
£161.9 |
16.7 |
15.5 |
11.8 |
10.7 |
1.8% |
2.0% |
Premium/(discount) to peer group (%) |
(30.3% |
(27.9%) |
(23.2%) |
(22.6%) |
11.2% |
7.9% |
|
Source: Bloomberg. Note: Prices at 23 February 2017. Treatt figures are calendarised to aid comparison.
Our DCF-derived fair value is now 350p (previously 293p) following the changes to our model detailed in our earnings section above (namely an increase in short- to medium-term sales forecast and margin assumptions). Our longer-term sales growth forecast remains at 3.5% pa, falling to 2% growth in perpetuity. Our DCF is calculated based on a WACC of 7.5% (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%.
Sensitivities
Despite 60% of turnover being exposed to the ‘defensive’ beverage sector, Treatt has a couple of key sensitivities, which it seeks to mitigate through the in-depth knowledge and skill base of its buying team and undertaking an active hedging policy where possible:
■
Commodity exposure: namely citrus oils, which make up c 30% of revenues.
■
Foreign exchange: translation risk on US dollar profits, which it manages through hedging.
Other points of interest
Relocation of UK business
Treatt has outgrown its current UK manufacturing facilities in Bury St Edmunds and had been exploring options for some time. In May 2015 the company announced its intention to fully relocate the UK business to another site near the existing one. On 22 December 2016, Treatt announced it had conditionally exchanged contracts on a 10 acre plot of land. The purchase is conditional upon the vendor obtaining outline planning permission, so the exact timing is unknown, but is likely to be later during CY17. The new facility will be purpose-built, with upgraded machinery and the latest technology. Construction is expected to begin in 2018, with the site up and running by late 2019.
FX
Although there have been sharp movements in FX, particularly with sterling devaluation following the EU referendum in the UK, Treatt has a number of hedging strategies in place, including using debt aligned with its business exposure. These mitigate the volatility and adverse movement in currency, particularly at the profit level. The underlying impact of the strengthening US dollar reduced profits by £0.5m in FY16, and the hedging policies should substantially reverse this figure in H117.
Exhibit 3: Financial summary
£000s |
2014 |
2015 |
2016 |
2017e |
2018e |
2019e |
||
Year end 30 September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
79,189 |
85,934 |
88,040 |
99,485 |
107,444 |
111,742 |
Cost of Sales |
(61,218) |
(66,955) |
(67,639) |
(75,338) |
(81,042) |
(84,061) |
||
Gross Profit |
17,971 |
18,979 |
20,401 |
24,147 |
26,402 |
27,681 |
||
EBITDA |
|
|
9,068 |
10,307 |
11,604 |
14,692 |
16,297 |
17,273 |
Operating Profit (before amort., except and sbp.) |
|
|
7,846 |
9,063 |
10,257 |
13,034 |
14,506 |
15,410 |
Intangible Amortisation |
(172) |
(175) |
(142) |
(160) |
(160) |
(160) |
||
Share based payments |
(46) |
(198) |
(566) |
(790) |
(866) |
(896) |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
7,628 |
8,690 |
9,549 |
12,084 |
13,480 |
14,355 |
||
Net Interest |
(724) |
(740) |
(703) |
(559) |
(851) |
(1,291) |
||
Exceptionals |
(1,402) |
(174) |
(553) |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
7,122 |
8,323 |
9,554 |
12,475 |
13,655 |
14,119 |
Profit Before Tax (FRS 3) |
|
|
5,502 |
7,776 |
8,293 |
11,525 |
12,629 |
13,063 |
Profit Before Tax (company) |
|
|
6,904 |
7,950 |
8,846 |
11,525 |
12,629 |
13,063 |
Tax |
(1,553) |
(1,786) |
(2,144) |
(2,939) |
(3,220) |
(3,331) |
||
Profit After Tax (norm) |
5,326 |
6,537 |
7,410 |
9,536 |
10,434 |
10,788 |
||
Profit After Tax (FRS 3) |
3,949 |
5,990 |
6,149 |
8,586 |
9,408 |
9,732 |
||
Average Number of Shares Outstanding (m) |
51.3 |
51.5 |
51.9 |
51.9 |
51.9 |
51.9 |
||
EPS - normalised (p) |
|
|
10.4 |
12.7 |
14.3 |
18.4 |
20.1 |
20.8 |
EPS - normalised & fully diluted (p) |
|
|
10.3 |
12.6 |
14.1 |
18.1 |
19.8 |
20.5 |
EPS - (IFRS) (p) |
|
|
7.7 |
11.6 |
11.8 |
16.5 |
18.1 |
18.8 |
Dividend per share (p) |
3.8 |
4.0 |
4.4 |
5.6 |
6.1 |
6.3 |
||
Gross Margin (%) |
22.7 |
22.1 |
23.2 |
24.3 |
24.6 |
24.8 |
||
EBITDA Margin (%) |
11.5 |
12.0 |
13.2 |
14.8 |
15.2 |
15.5 |
||
Operating Margin (before GW and except.) (%) |
9.9 |
10.5 |
11.7 |
13.1 |
13.5 |
13.8 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
13,777 |
13,381 |
16,161 |
22,335 |
39,996 |
43,150 |
Intangible Assets |
1,801 |
1,736 |
3,364 |
3,204 |
3,044 |
2,884 |
||
Tangible Assets |
10,994 |
10,998 |
11,361 |
17,695 |
35,516 |
38,830 |
||
Investments |
982 |
647 |
1,436 |
1,436 |
1,436 |
1,436 |
||
Current Assets |
|
|
43,590 |
45,045 |
54,435 |
51,081 |
53,515 |
54,407 |
Stocks |
28,020 |
25,799 |
29,990 |
30,904 |
32,302 |
32,477 |
||
Debtors |
14,509 |
17,635 |
17,853 |
19,676 |
20,713 |
21,430 |
||
Cash |
629 |
1,477 |
6,588 |
500 |
500 |
500 |
||
Other |
432 |
134 |
4 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(16,005) |
(13,481) |
(16,388) |
(17,660) |
(26,706) |
(24,799) |
Creditors |
(12,729) |
(12,675) |
(15,834) |
(16,383) |
(17,693) |
(18,401) |
||
Short term borrowings |
(2,356) |
(567) |
(487) |
(1,277) |
(9,012) |
(6,398) |
||
Provisions |
(920) |
(239) |
(67) |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(12,602) |
(11,760) |
(17,021) |
(9,951) |
(13,618) |
(12,111) |
Long term borrowings |
(7,857) |
(7,065) |
(7,755) |
(639) |
(4,506) |
(3,199) |
||
Other long term liabilities |
(4,745) |
(4,695) |
(9,266) |
(9,312) |
(9,112) |
(8,912) |
||
Net Assets |
|
|
28,760 |
33,185 |
37,187 |
45,805 |
53,188 |
60,647 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
3,528 |
8,667 |
10,804 |
13,986 |
14,973 |
16,889 |
Net Interest |
(724) |
(740) |
(703) |
(559) |
(851) |
(1,291) |
||
Tax |
(1,552) |
(1,469) |
(2,022) |
(2,939) |
(3,220) |
(3,331) |
||
Capex |
(538) |
(924) |
(679) |
(7,992) |
(19,612) |
(5,176) |
||
Acquisitions/disposals |
(208) |
(103) |
(861) |
0 |
0 |
0 |
||
Financing |
105 |
147 |
280 |
0 |
0 |
0 |
||
Dividends |
(1,899) |
(1,978) |
(2,095) |
(2,257) |
(2,892) |
(3,169) |
||
Net Cash Flow |
(1,288) |
3,600 |
4,724 |
238 |
(11,603) |
3,921 |
||
Opening net debt/(cash) |
|
|
8,294 |
9,584 |
6,155 |
1,654 |
1,416 |
13,019 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
(2) |
(171) |
(223) |
(0) |
0 |
0 |
||
Closing net debt/(cash) |
|
|
9,584 |
6,155 |
1,654 |
1,416 |
13,019 |
9,097 |
Source: Edison Investment Research, Treatt data
|
|
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