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Last close As at 24/03/2023
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Market capitalisation
GBP340m
Research: Consumer
Treatt has witnessed another good performance: H1 revenue grew by an impressive 9%, with growth across five of Treatt’s six categories. Management has upgraded its revenue growth expectations for the year to 15% and sees pre-tax profit being on track to meet current consensus of £21.7m, as the company continues to invest for the future. We upgrade our revenue forecasts in line with guidance, though our profit forecasts remain broadly unchanged. As per previous guidance, H2 is expected to witness both higher revenue growth than H1 and higher margins, thus reverting to a more normal H1/H2 split following two years distorted by the consequences of lockdowns.
Treatt |
Upgrading revenue forecasts |
H122 results |
Food & beverages |
12 May 2022 |
Share price performance
Business description
Next events
Analysts
Treatt is a research client of Edison Investment Research Limited |
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Treatt has witnessed another good performance: H1 revenue grew by an impressive 9%, with growth across five of Treatt’s six categories. Management has upgraded its revenue growth expectations for the year to 15% and sees pre-tax profit being on track to meet current consensus of £21.7m, as the company continues to invest for the future. We upgrade our revenue forecasts in line with guidance, though our profit forecasts remain broadly unchanged. As per previous guidance, H2 is expected to witness both higher revenue growth than H1 and higher margins, thus reverting to a more normal H1/H2 split following two years distorted by the consequences of lockdowns.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
09/20 |
109.0 |
15.8 |
21.3 |
6.0 |
37.6 |
0.7 |
09/21 |
124.3 |
22.7 |
30.1 |
7.5 |
26.6 |
0.9 |
09/22e |
143.0 |
24.0 |
32.1 |
8.0 |
25.0 |
1.0 |
09/23e |
151.6 |
25.9 |
34.2 |
8.5 |
23.4 |
1.1 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Strong demand
Strong demand has been driven by Treatt’s core citrus category (+15% y-o-y), where more sophisticated, higher-value offerings are continuing to drive growth. Revenue growth was also strong in both synthetic aroma (+20% y-o-y), and herbs, spices & florals (+23% y-o-y), in part driven by higher demand for flavourings in the alternative protein segment. Tea (revenues down 41% vs H121) was adversely affected by the timing of launches in the prior year causing a particularly tough comparative, and a recovery is expected by management in H2. Crucially, H1 has ended strongly and the momentum has continued into H2, with stronger growth expected to come from the higher-margin healthier living categories. We therefore expect margins to be materially stronger in H2.
H122 results
H122 revenues were up 9.0% to £66.3m, with growth in most categories. Gross margins were down 750bps on the prior year, but up 130bps versus H120, which was mostly unaffected by the pandemic. Adjusted PBT was £6.3m, versus £10.4m in H121 and £6.1m in H120. We raise our sales forecasts by 6% for FY22–24, though our profit forecasts are broadly unchanged.
Valuation: Trading at a premium to peers
We estimate that the current share price is discounting medium-term sales growth of 5.0%, falling to 1.5% in perpetuity, with a WACC of 5.7% and a terminal EBIT margin of 20.0% (vs 17.2% in FY21). Our earnings estimates remain broadly unchanged following the announcement. Treatt trades at 25.0x FY22e P/E and 16.9x FY22e EV/EBITDA. It trades at a c 10% discount to its peer group on a P/E basis and a 5% discount on EV/EBITDA, although it trades broadly at a c20% discount on both metrics if we exclude those peers 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 FY22–24 as detailed in Exhibit 1. We leave our growth assumptions for FY23 and FY24 unchanged, but absolute revenue forecasts increase due to the higher base. As discussed above, we believe margins are likely to be lower than we had previously forecast given the continued investment in the business, and we therefore leave our profit forecasts broadly unchanged.
We have increased our working capital outflow forecast for the year in light of the unusually strong outflows in H122, which reflected inventory builds to meet the strong pipeline of orders and generally higher raw material prices, most particularly for orange oil. We continue to expect that Treatt will experience the usual cash inflow during H2. We now expect net debt of c £8m for FY22, versus a net debt balance of £19.8m at end H122 and £9.1m at end FY21.
Exhibit 1: Old vs new key forecasts
2022 |
2023 |
2024 |
|||||||
Old |
New |
Diff |
Old |
New |
Diff |
Old |
New |
Diff |
|
Revenue (£000) |
134,894 |
142,975 |
6.0% |
142,987 |
151,553 |
6.0% |
151,567 |
160,647 |
6.0% |
Operating profit (£000) |
22,014 |
21,974 |
-0.2% |
23,764 |
23,747 |
-0.1% |
25,644 |
25,654 |
0.0% |
PBT* (£000) |
21,993 |
21,927 |
-0.3% |
23,796 |
23,725 |
-0.3% |
25,728 |
25,685 |
21,993 |
PBT (pre-exceptional) Edison (£000) |
24,050 |
23,978 |
-0.3% |
25,974 |
25,896 |
-0.3% |
28,037 |
27,990 |
24,050 |
Basic EPS* (p) |
28.8 |
28.7 |
-0.3% |
30.7 |
30.6 |
-0.3% |
32.7 |
32.7 |
28.8 |
Basic EPS (pre-exceptional) Edison (p) |
32.2 |
32.1 |
-0.3% |
34.3 |
34.2 |
-0.3% |
36.6 |
36.5 |
32.2 |
Net debt/(cash) (£000) |
(2,641) |
7,989 |
N/A |
(12,499) |
(1,170) |
N/A |
(23,067) |
(13,023) |
N/A |
Source: Edison Investment Research. Note: *Stated on an IFRS/reported basis.
Valuation
We illustrate Treatt’s relative valuation versus its ingredients peer group in Exhibit 2 below. For 2022, based on Edison estimates, Treatt trades at a c 10% discount to its peer group on a P/E basis and a 5% discount 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 c20% discount to its remaining peers on both P/E and EV/EBITDA. Although it is smaller than its peers, its portfolio of products is increasingly specialised and the company has demonstrated its resilience with a robust performance despite the pandemic.
Exhibit 2: Comparative valuation
Market cap |
P/E (x) |
EV/EBITDA (x) |
Dividend yield (%) |
|||||
2022e |
2023e |
2022e |
2023e |
2022e |
2023e |
|||
Givaudan |
CHF 32,502 |
35.3 |
31.5 |
24.1 |
22.3 |
1.9 |
2.0 |
|
IFF |
$32,619 |
22.1 |
19.5 |
17.1 |
15.4 |
2.4 |
2.5 |
|
Symrise |
CHF 14,138 |
32.9 |
29.1 |
17.6 |
16.2 |
1.1 |
1.2 |
|
Chr Hansen |
DKK 69,238 |
39.5 |
35.0 |
23.8 |
21.7 |
1.6 |
1.8 |
|
Kerry |
€ 17,390 |
23.3 |
21.0 |
16.6 |
15.2 |
1.0 |
1.2 |
|
Ingredion |
$5,749 |
12.2 |
11.2 |
7.8 |
7.5 |
3.0 |
3.1 |
|
Peer group average |
27.6 |
24.5 |
17.8 |
16.4 |
1.9 |
2.0 |
||
Treatt |
£482 |
25.0 |
23.4 |
16.9 |
15.8 |
1.0 |
1.1 |
|
Premium/(discount) to peer group (%) |
(9.4%) |
(4.5%) |
(5.0%) |
(3.2%) |
(46.8%) |
(46.4%) |
||
Source: Refinitiv, Edison Investment Research. Note: Prices as of 11 May 2022.
Exhibit 3: Financial summary
£000s |
2018 |
2019 |
2020 |
2021 |
2022e |
2023e |
2024e |
|||
Year-end September |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|||
PROFIT & LOSS |
||||||||||
Revenue |
|
|
112,163 |
112,717 |
109,016 |
124,326 |
142,975 |
151,553 |
160,647 |
|
Cost of Sales |
(84,407) |
(84,060) |
(77,140) |
(82,103) |
(94,847) |
(100,084) |
(105,607) |
|||
Gross Profit |
27,756 |
28,657 |
31,876 |
42,223 |
48,128 |
51,470 |
55,040 |
|||
EBITDA |
|
|
16,627 |
15,785 |
17,862 |
24,877 |
28,976 |
30,960 |
33,036 |
|
Operating Profit (before amort., except and sbp) |
|
|
15,108 |
14,226 |
16,053 |
23,172 |
24,026 |
25,918 |
27,959 |
|
Intangible Amortisation |
(124) |
(90) |
(75) |
(93) |
(79) |
(67) |
(57) |
|||
Share based payments |
(1,040) |
(637) |
(886) |
(1,733) |
(1,973) |
(2,104) |
(2,248) |
|||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
|||
Operating Profit |
13,944 |
13,499 |
15,092 |
21,346 |
21,974 |
23,747 |
25,654 |
|||
Net Interest |
(1,302) |
(199) |
(291) |
(427) |
(48) |
(22) |
30 |
|||
Exceptionals |
(1,105) |
(755) |
(1,060) |
(1,302) |
0 |
0 |
0 |
|||
Profit Before Tax (norm) |
|
|
13,806 |
14,027 |
15,762 |
22,745 |
23,978 |
25,896 |
27,990 |
|
Profit Before Tax (FRS 3) |
|
|
11,537 |
12,545 |
13,741 |
19,617 |
21,927 |
23,725 |
25,685 |
|
Profit Before Tax (company) |
|
|
12,642 |
13,300 |
14,801 |
20,919 |
21,927 |
23,725 |
25,685 |
|
Tax |
(2,284) |
(2,673) |
(2,896) |
(4,469) |
(4,684) |
(5,338) |
(6,036) |
|||
Profit After Tax (norm) |
11,392 |
11,263 |
12,762 |
18,090 |
19,294 |
20,558 |
21,954 |
|||
Profit After Tax (FRS 3) |
9,253 |
9,872 |
10,845 |
15,148 |
17,242 |
18,387 |
19,649 |
|||
Discontinued operations |
2,976 |
(1,084) |
0 |
0 |
0 |
0 |
0 |
|||
Average Number of Shares Outstanding (m) |
56.8 |
59.1 |
59.8 |
60.1 |
60.1 |
60.1 |
60.1 |
|||
EPS - normalised (p) |
|
|
20.1 |
19.0 |
21.3 |
30.1 |
32.1 |
34.2 |
36.5 |
|
EPS - adjusted (p) |
|
|
18.0 |
17.8 |
19.7 |
27.1 |
28.7 |
30.6 |
32.7 |
|
EPS - (IFRS) (p) |
|
|
16.3 |
16.7 |
18.1 |
25.2 |
28.7 |
30.6 |
32.7 |
|
Dividend per share (p) |
5.1 |
5.5 |
6.0 |
7.5 |
8.0 |
8.5 |
9.1 |
|||
Gross Margin (%) |
24.7 |
25.4 |
29.2 |
34.0 |
33.7 |
34.0 |
34.3 |
|||
EBITDA Margin (%) |
14.8 |
14.0 |
16.4 |
20.0 |
20.3 |
20.4 |
20.6 |
|||
Operating Margin (before GW and except.) (%) |
13.5 |
12.6 |
14.7 |
18.6 |
16.8 |
17.1 |
17.4 |
|||
Operating Margin (%) |
12.4 |
12.0 |
13.8 |
17.2 |
15.4 |
15.7 |
16.0 |
|||
BALANCE SHEET |
||||||||||
Fixed Assets |
|
|
21,863 |
31,730 |
54,048 |
65,811 |
66,370 |
68,534 |
68,810 |
|
Intangible Assets |
752 |
845 |
1,358 |
2,424 |
2,345 |
2,278 |
2,221 |
|||
Tangible Assets |
20,038 |
29,485 |
50,159 |
61,039 |
63,233 |
65,464 |
65,798 |
|||
Investments |
1,073 |
1,400 |
2,531 |
2,348 |
792 |
792 |
792 |
|||
Current Assets |
|
|
102,401 |
98,158 |
69,472 |
83,606 |
95,349 |
94,089 |
111,036 |
|
Stocks |
39,642 |
36,799 |
36,050 |
47,263 |
57,905 |
61,076 |
64,419 |
|||
Debtors |
28,828 |
23,020 |
24,167 |
26,371 |
30,184 |
31,843 |
33,593 |
|||
Cash |
32,304 |
37,187 |
7,739 |
7,260 |
7,260 |
7,260 |
13,023 |
|||
Other |
1,627 |
1,152 |
1,516 |
2,712 |
0 |
0 |
0 |
|||
Current Liabilities |
|
|
(35,781) |
(28,905) |
(15,989) |
(30,460) |
(30,918) |
(21,196) |
(21,620) |
|
Creditors |
(16,479) |
(11,784) |
(12,640) |
(17,620) |
(20,609) |
(21,053) |
(21,477) |
|||
Short term borrowings |
(19,244) |
(16,860) |
(3,203) |
(12,697) |
(10,166) |
(4,060) |
0 |
|||
Provisions |
(58) |
(261) |
(146) |
(143) |
(143) |
(143) |
(143) |
|||
Long Term Liabilities |
|
|
(6,858) |
(13,876) |
(16,411) |
(11,605) |
(15,064) |
(12,011) |
(9,981) |
|
Long term borrowings |
(3,001) |
(4,369) |
(3,450) |
(2,624) |
(5,083) |
(2,030) |
0 |
|||
Other long-term liabilities |
(3,857) |
(9,507) |
(12,961) |
(8,981) |
(9,981) |
(9,981) |
(9,981) |
|||
Net Assets |
|
|
81,625 |
87,107 |
91,120 |
107,352 |
115,736 |
131,446 |
148,245 |
|
CASH FLOW |
||||||||||
Operating Cash Flow |
|
|
3,580 |
20,544 |
15,677 |
13,892 |
17,511 |
26,573 |
28,367 |
|
Net Interest |
(609) |
(199) |
(191) |
(270) |
(48) |
(22) |
30 |
|||
Tax |
(2,978) |
(2,208) |
(2,191) |
(4,874) |
(4,684) |
(5,338) |
(6,036) |
|||
Capex |
(6,190) |
(10,392) |
(23,909) |
(13,195) |
(7,145) |
(7,273) |
(5,410) |
|||
Acquisitions/disposals |
8,357 |
855 |
(1,041) |
(1,178) |
0 |
0 |
0 |
|||
Financing |
21,090 |
622 |
(69) |
(212) |
0 |
0 |
0 |
|||
Dividends |
(2,876) |
(3,080) |
(3,378) |
(3,704) |
(4,509) |
(4,781) |
(5,098) |
|||
Net Cash Flow |
20,374 |
6,142 |
(15,102) |
(9,541) |
1,125 |
9,159 |
11,854 |
|||
Opening net debt/(cash) |
|
|
10,225 |
(10,059) |
(15,958) |
(427) |
9,114 |
7,989 |
(1,170) |
|
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
|||
Other |
(90) |
(243) |
(429) |
(0) |
0 |
0 |
(0) |
|||
Closing net debt/(cash) |
|
|
(10,059) |
(15,958) |
(427) |
9,114 |
7,989 |
(1,170) |
(13,023) |
|
Source: Edison Investment Research, company data
|
|
Research: Real Estate
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