Currency in GBP
Last close As at 26/05/2023
GBP7.24
▲ 20.00 (2.84%)
Market capitalisation
GBP436m
Research: Consumer
Treatt has again delivered a strong performance across all its categories, with revenue expected to grow 16% at constant currency for H1. As flagged in the January trading update, the business is performing extremely well: its categories are meeting consumer demands for more natural, clean-label products and Treatt has won significant new business across a range of applications. Gross margin has expanded due to higher growth in the higher-margin categories of tea, health & wellness, and fruit & vegetables, and Treatt’s transition to more sophisticated citrus products. Citrus revenue returned to modest growth after a decline in FY20. The new UK facility is opening in April 2021 with commissioning of the machinery later in the calendar year, as planned. We leave our estimates unchanged at this stage, but believe the risk is firmly to the upside, given the positive momentum in the business.
Treatt |
Another strong update |
H1 trading update |
Food & beverages |
12 April 2021 |
Share price performance
Business description
Next events
Analysts
Treatt is a research client of Edison Investment Research Limited |
Treatt has again delivered a strong performance across all its categories, with revenue expected to grow 16% at constant currency for H1. As flagged in the January trading update, the business is performing extremely well: its categories are meeting consumer demands for more natural, clean-label products and Treatt has won significant new business across a range of applications. Gross margin has expanded due to higher growth in the higher-margin categories of tea, health & wellness, and fruit & vegetables, and Treatt’s transition to more sophisticated citrus products. Citrus revenue returned to modest growth after a decline in FY20. The new UK facility is opening in April 2021 with commissioning of the machinery later in the calendar year, as planned. We leave our estimates unchanged at this stage, but believe the risk is firmly to the upside, given the positive momentum in the business.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/19 |
112.7 |
14.0 |
19.0 |
5.5 |
50.3 |
0.6% |
09/20 |
109.0 |
15.8 |
21.3 |
6.0 |
44.9 |
0.6% |
09/21e |
123.2 |
19.4 |
26.4 |
7.5 |
36.4 |
0.8% |
09/22e |
130.6 |
21.5 |
29.3 |
8.3 |
32.7 |
0.9% |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Growth continues apace
Treatt has transformed itself from a commodity-based ingredients trading house into a supplier of value-added ingredients and ingredient solutions. Treatt’s technical expertise is being applied across a growing range of applications and is enabling it to move up the value chain, most recently in the citrus category. In turn, this has led to both revenue growth and margin expansion and we expect this to continue over the next few years.
Demand remains strong
Demand for flavour ingredients is strong as consumers increasingly demand authentic flavours and clean labels. While the pandemic has resulted in beverage companies witnessing a reduction in volumes coupled with a margin-eroding switch from the on- to the off-trade channel, the more important metric for the flavour industry is overall volume. Treatt is taking a cautious approach, but its order book may improve further in H2 as the hospitality industry recovers.
Valuation: At a premium to its peers
We value Treatt using a DCF model, which indicates a fair value of 870p. In January we raised our operating forecasts materially. We leave our forecasts unchanged but believe the risk remains firmly to the upside given the momentum in the business and the potential for further volume gains once the hospitality business recovers. Treatt trades at 32.7x FY22e P/E and 20.4x FY22e EV/EBITDA. This represents a c 10% premium in both cases.
Valuation
We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 1 below. For 2022, Treatt trades at a c 10% premium to its peer group on both P/E and EV/EBITDA (the valuation premiums are larger for FY21 in light of the expected strong growth). Historically, Treatt has traded at a discount to its peers, but the discount has narrowed and changed to a premium as the company has moved up the value chain. Although it is smaller than many of its competitors, its portfolio of products is increasingly specialised and Treatt has demonstrated its resilience with a robust performance despite the COVID-19 pandemic. Our DCF model indicates a fair value of 870p, although we believe the latest trading statement suggests the risk to forecasts lies firmly on the upside.
Exhibit 1: Comparative valuation
Market cap (m) |
P/E (x) |
EV/EBITDA (x) |
Dividend yield (%) |
|||||
2021e |
2022e |
2021e |
2022e |
2021e |
2022e |
|||
Givaudan |
CHF 35,115 |
39.5 |
36.2 |
26.4 |
25.0 |
1.8 |
1.8 |
|
IFF |
$34,908 |
23.8 |
21.3 |
15.2 |
13.3 |
2.2 |
2.4 |
|
Symrise |
CHF 14,633 |
40.5 |
36.7 |
20.1 |
18.8 |
1.0 |
1.1 |
|
Chr Hansen |
DKK 80,377 |
50.5 |
43.5 |
31.5 |
28.4 |
1.4 |
1.4 |
|
Kerry |
€ 19,888 |
29.1 |
26.4 |
20.1 |
18.8 |
0.8 |
0.9 |
|
Ingredion |
$6,077 |
13.7 |
12.7 |
8.3 |
7.9 |
2.9 |
2.9 |
|
Peer group average |
35.1 |
32.8 |
25.2 |
20.2 |
1.3 |
1.7 |
||
Treatt |
£573.3 |
36.4 |
32.7 |
24.6 |
20.4 |
0.8 |
0.9 |
|
Premium/(discount) to peer group (%) |
10.8% |
11.2% |
21.4% |
9.2% |
(53.6%) |
(50.3%) |
Source: Refinitiv, Edison Investment Research. Note: Priced at 9 April 2021.
Exhibit 2: Financial summary
£000's |
2017 |
2018 |
2019 |
2020 |
2021e |
2022e |
2023e |
||
Year-end September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||||
Revenue |
|
|
101,250 |
112,163 |
112,717 |
109,016 |
123,188 |
130,579 |
138,414 |
Cost of Sales |
(75,985) |
(84,407) |
(84,060) |
(77,140) |
(86,552) |
(91,092) |
(95,866) |
||
Gross Profit |
25,265 |
27,756 |
28,657 |
31,876 |
36,636 |
39,487 |
42,548 |
||
EBITDA |
|
|
15,049 |
16,627 |
15,785 |
17,862 |
23,322 |
28,048 |
30,495 |
Operating Profit (before amort., except and sbp.) |
|
|
13,650 |
15,108 |
14,226 |
16,053 |
19,413 |
21,539 |
23,855 |
Intangible Amortisation |
(137) |
(124) |
(90) |
(75) |
(64) |
(54) |
(46) |
||
Share based payments |
(966) |
(1,040) |
(637) |
(886) |
(1,186) |
(1,318) |
(1,464) |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
12,547 |
13,944 |
13,499 |
15,092 |
18,163 |
20,166 |
22,345 |
||
Net Interest |
(851) |
(1,302) |
(199) |
(291) |
(14) |
2 |
53 |
||
Exceptionals |
0 |
(1,105) |
(755) |
(1,060) |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
12,799 |
13,806 |
14,027 |
15,762 |
19,399 |
21,540 |
23,908 |
Profit Before Tax (FRS 3) |
|
|
11,696 |
11,537 |
12,545 |
13,741 |
18,149 |
20,168 |
22,398 |
Profit Before Tax (company) |
|
|
11,696 |
12,642 |
13,300 |
14,801 |
18,149 |
20,168 |
22,398 |
Tax |
(3,129) |
(2,284) |
(2,673) |
(2,896) |
(3,630) |
(4,034) |
(4,480) |
||
Profit After Tax (norm) |
9,670 |
11,392 |
11,263 |
12,762 |
15,769 |
17,507 |
19,428 |
||
Profit After Tax (FRS 3) |
8,567 |
9,253 |
9,872 |
10,845 |
14,519 |
16,135 |
17,918 |
||
Discontinued operations |
978 |
2,976 |
(1,084) |
0 |
0 |
0 |
0 |
||
Average Number of Shares Outstanding (m) |
52.2 |
56.8 |
59.1 |
59.8 |
59.8 |
59.8 |
59.8 |
||
EPS - normalised (p) |
|
|
18.5 |
20.1 |
19.0 |
21.3 |
26.4 |
29.3 |
32.5 |
EPS - adjusted (p) |
|
|
18.3 |
18.0 |
17.8 |
19.7 |
24.3 |
27.0 |
29.9 |
EPS - (IFRS) (p) |
|
|
16.4 |
16.3 |
16.7 |
18.1 |
24.3 |
27.0 |
29.9 |
Dividend per share (p) |
4.8 |
5.1 |
5.5 |
6.0 |
7.5 |
8.3 |
9.3 |
||
Gross Margin (%) |
25.0 |
24.7 |
25.4 |
29.2 |
29.7 |
30.2 |
30.7 |
||
EBITDA Margin (%) |
14.9 |
14.8 |
14.0 |
16.4 |
18.9 |
21.5 |
22.0 |
||
Operating Margin (before GW and except.) (%) |
13.5 |
13.5 |
12.6 |
14.7 |
15.8 |
16.5 |
17.2 |
||
BALANCE SHEET |
|||||||||
Fixed Assets |
|
|
19,532 |
21,863 |
31,730 |
54,048 |
62,250 |
61,146 |
61,536 |
Intangible Assets |
3,331 |
752 |
845 |
1,358 |
1,294 |
1,240 |
1,194 |
||
Tangible Assets |
14,821 |
20,038 |
29,485 |
50,159 |
59,598 |
58,548 |
58,984 |
||
Investments |
1,380 |
1,073 |
1,400 |
2,531 |
1,358 |
1,358 |
1,358 |
||
Current Assets |
|
|
68,230 |
102,401 |
98,158 |
69,472 |
75,291 |
78,953 |
91,617 |
Stocks |
42,878 |
39,642 |
36,799 |
36,050 |
40,490 |
42,658 |
44,941 |
||
Debtors |
19,973 |
28,828 |
23,020 |
24,167 |
27,062 |
28,555 |
30,130 |
||
Cash |
4,748 |
32,304 |
37,187 |
7,739 |
7,739 |
7,739 |
16,545 |
||
Other |
631 |
1,627 |
1,152 |
1,516 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(27,003) |
(35,781) |
(28,905) |
(15,989) |
(20,693) |
(13,930) |
(13,201) |
Creditors |
(19,266) |
(16,479) |
(11,784) |
(12,640) |
(12,981) |
(13,107) |
(13,201) |
||
Short term borrowings |
(7,680) |
(19,244) |
(16,860) |
(3,203) |
(7,712) |
(823) |
0 |
||
Provisions |
(57) |
(58) |
(261) |
(146) |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(14,281) |
(6,858) |
(13,876) |
(16,411) |
(17,617) |
(13,973) |
(13,361) |
Long term borrowings |
(7,293) |
(3,001) |
(4,369) |
(3,450) |
(3,856) |
(412) |
0 |
||
Other long term liabilities |
(6,988) |
(3,857) |
(9,507) |
(12,961) |
(13,761) |
(13,561) |
(13,361) |
||
Net Assets |
|
|
46,478 |
81,625 |
87,107 |
91,120 |
99,232 |
112,196 |
126,591 |
CASH FLOW |
|||||||||
Operating Cash Flow |
|
|
4,683 |
3,580 |
20,544 |
15,677 |
16,326 |
24,312 |
26,532 |
Net Interest |
(913) |
(609) |
(199) |
(191) |
(14) |
2 |
53 |
||
Tax |
(2,822) |
(2,978) |
(2,208) |
(2,191) |
(3,630) |
(4,034) |
(4,480) |
||
Capex |
(5,111) |
(6,190) |
(10,392) |
(23,909) |
(13,348) |
(5,459) |
(7,076) |
||
Acquisitions/disposals |
(1,667) |
8,357 |
855 |
(1,041) |
0 |
0 |
0 |
||
Financing |
270 |
21,090 |
622 |
(69) |
0 |
0 |
0 |
||
Dividends |
(3,025) |
(2,876) |
(3,080) |
(3,378) |
(3,590) |
(4,488) |
(4,987) |
||
Net Cash Flow |
(8,585) |
20,374 |
6,142 |
(15,102) |
(4,256) |
10,334 |
10,041 |
||
Opening net debt/(cash) |
|
|
1,654 |
10,225 |
(10,059) |
(15,958) |
(427) |
3,829 |
(6,504) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
14 |
(90) |
(243) |
(429) |
(0) |
0 |
(0) |
||
Closing net debt/(cash) |
|
|
10,225 |
(10,059) |
(15,958) |
(427) |
3,829 |
(6,504) |
(16,545) |
Source: Edison Investment Research, Company data
|
|
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