Treatt — Update 17 May 2016

Treatt (LSE: TET)

Last close As at 21/11/2024

420.00

2.00 (0.48%)

Market capitalisation

257m

More on this equity

Research: Consumer

Treatt — Update 17 May 2016

Treatt

Analyst avatar placeholder

Written by

Consumer

Treatt

New strategy playing out

Interim results

Food & beverages

17 May 2016

Price

177.5p

Market cap

£92m

Net debt (£m) at 31 March 2016

8.4

Shares in issue

51.5m

Free float

100%

Code

TET

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.2

(2.2)

23.7

Rel (local)

6.0

(7.1)

38.4

52-week high/low

190.0p

145.0p

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

Trading update

End September

FY 16 results

29 November 2016

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

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*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Treatt and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

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

More on Treatt

View All

Latest from the Consumer sector

View All Consumer content

Consumer

ConsumerWatch – Don’t look down

Consumer

The Platform Group — E-commerce enabler

Consumer

MoneyHero — Investing for the long term

Consumer

Games Workshop Group — Sigmar the fourth

Research: Energy & Resources

Egdon Resources — Update 16 May 2016

Egdon Resources

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free