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Dish of the day Admissions: None Delistings: Craven House Capital (CRV.L) has left AIM What’s baking in the oven? Potential** Initial Public Offerings:*** 24th July: Scotch Corner Designer Village, a newly formed single asset real estate company (to be re-registered as a public limited company) which is developing a retail outlet and leisure destination, announces it may consider an IPO on the newly launched Aquis Real Asset Market (ARAM) of the Aquis Stock Exchange. Timing and deal details TBC.
TET TMG PEB NTVO MFX IOM BGO
Whilst this is a tough update, Treatt remains well invested, has a strong balance sheet, and has a number of interesting opportunities still in the pipeline. However, given the revised guidance and outlook, we reduce our target price to 350p. We maintain our Buy rating.
Treatt plc
TET has issued a profit warning for FY25 to September. It now expects FY25 revenue of £130-135m (previous guidance £146-153m) and PBT of £9-11m (previous guidance £16-18m). We reduce our revenue forecast to £130m (previously £146m) and our PBT forecast to £9m (previously £16m). Our FY25E PBT downgrade is therefore 44%. We now assume a 5p DPS. Our new forecasts imply H225 revenue of c.£66m, slightly up on the £64m posted in H125 but declining at a worse rate (-19%) versus H224 than the H1 decline of -11%. Our new forecasts imply H225 PBT of £5.4m, better than the £3.6m posted in H125 but declining at roughly the same rate versus the prior year as in H1 (down c.50%). We forecast an operating margin of 7.2% for FY25E, versus 13.0% in FY24. This equates to 8.4% in H225, better than the 6.0% in H125 but declining at a slightly worse rate versus the prior year. The reduction in FY25 guidance is partly due to the continuation of the issues that affected H1, namely weak consumer confidence in the US and the impact of high prices on citrus demand. TET has also seen slower than expected conversion of the order pipeline and a more competitive pricing environment. The combination of lower-than-expected profits and a faster completion of the buyback takes our FY25E net debt forecast to £5m. TET has not offered any guidance for FY26, other than to say that it expects to benefit from the recent fall in citrus prices and that the pipeline has strengthened during the year. With TET having noted the slower than expected pipeline conversion we would also expect some of this to come through in H126. Nonetheless, given that the market environment remains challenging, we think it prudent to forecast only modest growth in profit in FY26E and cut our PBT forecast by 46% to £9.5m (previously £17.5m).
The market cap is similar to book NAV of c.£150m. Treatt is well invested, has a strong balance sheet and an attractive pipeline of new business opportunities, which should restore profitability if they land.
TET had already released a detailed H125 trading update, so the key numbers are as expected. Revenue fell by 11% to £64.2m, due to weaker US consumer confidence and the impact of high citrus oil prices. TET was therefore adversely affected by lower consumer demand for its Premium portfolio, and by lower demand for citrus flavourings as customers changed buying patterns and reformulated. TET has supported customers with the latter, but this has only ever been a partial mitigation. H125 PBT was £3.6m, down from £7.6m in H124, reflecting a 290bps fall in gross margin and some growth in administrative expenses from investment in sales capability. TET has maintained its FY25 revenue guidance of £146-153m. Our forecast is unchanged at £146m, requiring 1% growth in H225. This is already 50% covered, and TET expects 35% to be delivered through repeat customer business based on previous trends and current indicators. The remaining 15%, a similar level to last year, is expected to be delivered through existing pipeline opportunities. The indications here, and for future years, are encouraging, with a potentially significant new customer win in North America, and 27 new customer wins overall with a bias towards China/Asia. The investments that TET has made in its sales capability are paying off. FY25 PBT guidance is unchanged at £16-18m (our forecast remains £16m). TET is relatively sanguine on the potential impact from tariffs, with its global supply chain giving it flexibility and potentially the ability to win new business and mitigate any negative impacts. However, the situation remains fluid. As previously announced, TET’s balance sheet continued to strengthen, ending H125 with £0.9m of net cash, facilitating a £5m share buyback programme across FY25/FY26, in line with its capital allocation framework.
Book NAV is c.£150m, which is currently in line with the market cap. Given how well invested the business is and its continuing profitability, we expect this value to soon be realised. We reiterate our Buy rating and 485p TP.
There are strong headwinds in the market, which are having an impact on Treatt’s trading in the short term. Given the uncertain consumer outlook and the importance of the US market, as well as persistent elevation in citrus prices, we reduce our equivalent adjusted PBT (inc SBP) forecasts by 22%. The company continues to make strong strategic progress in spite of the macro conditions. We retain Buy, but lower our TP from 800p to 485p.
TET has released a trading update covering H125 to 31 March. Revenue fell by 11% to £64.2m, from £72.1m in H124. This was caused by weaker US consumer confidence and the ongoing impact of high citrus oil prices. The former has deteriorated further recently, and the latter has remained an issue. TET has therefore been adversely affected by lower final consumer demand for its Premium portfolio, and by lower demand for citrus flavourings as customers have both changed buying patterns and reformulated. Although TET continues to support customers with the latter, this has only ever been a partial mitigation. Citrus remains a core ingredient for soft drinks, but TET needs some relief from a better Brazilian harvest and/or improving US consumer confidence for its prospects to improve. H125 PBT is expected to be c.£3.6m, down from £7.6m in H124. We estimate that this includes a 200-250bps fall in gross margin and some growth in administrative expenses, reflecting investment in sales capability. TET is guiding to a FY25 revenue range of £146-153m. Given the current macro uncertainty, we go the bottom of that range. This would imply a 4.6% fall in FY25 revenue and require 1% growth in H225. It is guiding to a FY25 PBT range of £16-18m, and again we go the bottom of that range. This would imply a c.£3m fall in FY25 PBT and require a c.£1m increase in H225. More happily, TET’s balance sheet has continued to strengthen, ending H125 with £0.9m of net cash. This has enabled TET to announce a new £5m share buyback programme over FY25/26, in line with its capital allocation framework.
TET has released a trading statement covering the first four months of FY25 (October – January). Fiscal Q1, which is TET’s smallest quarter, was in line with management expectations. Fiscal Q2 “has started well” and TET is “encouraged by a robust pipeline and order intake”, which bodes well for H1 and indeed for the rest of FY25. The company’s outlook for the full year remains unchanged, and we make no changes to our forecasts. However, we see this statement as positive and supportive of our estimates. As a reminder, TET set out a comprehensive growth plan at its FY24 results presentation in December. This covered three main areas: (i) expanding reach (ii) broadening into high value categories and (iii) a differentiated service model. The first focuses on entering more geographies, outside of North America and Europe, particularly in Asia. The second includes pushing premium products harder and building on TET’s existing presence outside of carbonates, where growth in high-value categories (such as energy and sports drinks) would be margin-enhancing over time. Progress here should leave the medium-term operating margin target of 15% (from 13.0% in FY24) looking very achievable. The third is about getting closer to customers, including through the new regional structure, which is already in place. TET has already made much of the investment required to achieve these objectives. It has c.50% spare capacity in the UK and c.30% in the US, has most of the necessary technological expertise, and has already put additional regional sales resource into the US and Europe. Where it is looking to move into new markets, it will use local distributors, which is a low-cost option. Its new Shanghai Innovation Centre, which is on track to open later this year, is being funded within existing budgets.
Treatt (TET) has reported FY24 results to 30 September. Revenue of £153.1m was slightly below guidance of c.£155.2m, with growth of 3.8% and constant currency growth of 5.7%. This was due to a substantial citrus shipment being delayed for a few days by US port disruption, and therefore falling into Q1 of FY25 rather than Q4 of FY24. Clean PBT was nonetheless ahead of expectations at £19.1m versus the previous guidance of c.£18.8m. Net debt (including leases) of £0.7m was as expected. DPS of 8.41p was above our forecast of 8.2p. Gross margin was 29.1%, down 130bps vs FY23, and in the middle of the 28-30% guidance range. The decline was due to rising citrus costs, which mechanically reduces the percentage margin, even if it is passed on and cash margins are maintained (which is the objective). There was also some negative product margin mix due to the strong growth of citrus and lower-priced products for price-sensitive consumers. Administrative costs fell by 7.1% due to the cost discipline imposed in the previous year, and despite adding some senior sales staff to help drive revenue growth. This allowed for 60bps of operating margin improvement despite the lower gross margin. Q125 will have benefited (in early October) from the reversal of the negative shipment phasing impact noted above, and the comparable period saw the tail-end of customer de-stocking. However, with fiscal Q1 being TET’s smallest quarter, and with it being in contract negotiation season, we leave our PBT forecasts unchanged. Finally, we look forward to hearing more about the opportunities that the new CEO, David Shannon, sees for the business in this morning’s presentation.
The valuation gap to peers is still significant, and we expect it to narrow materially as confidence in the outlook improves. Treatt has >50% spare capacity and numerous growth opportunities ahead. We reiterate our Buy rating and 800p TP.
Treatt (TET) has issued a trading update covering FY24 (to 30 September). Revenue growth was 5%, or 7% at constant currency. H224 revenue growth was 16%, or c.18% at constant currency, due to new business wins and a normalisation in industry demand (after the de-stocking in H223). FY24 revenue is now expected to be c.£155.2m, 2% above our previous forecast of £152.0m. Key growth drivers included Citrus, up 30% in H2 after a softer H1, and China, up 27% in FY24 after only +1% in H1 (implying +50% in H2). This strong growth in China has encouraged TET to approve a new innovation facility in Shanghai to increase its ability to tailor its products to local tastes, in collaboration with its growing number of local customers. The weaker areas were coffee, where TET revenues were down but the commitment to the category remains strong, and some premium beverage categories in the US as consumers traded down. TET remains on track to meet FY24 PBT expectations, guiding to c.£18.8m versus our (unchanged) forecast of £18.9m. This has been achieved despite an FX headwind of close to £1m, and investment in expanding the size of the sales force, with new heads in continental Europe and the US regions. TET ended FY24 with net debt of only £0.7m, £3.5m better than our forecast of £4.2m, as careful cash management becomes embedded in the business. We believe that its pipeline of fast payback investment opportunities would be the best use of its strong balance sheet in the short to medium term. We understand that TET had a good exit rate (and an encouraging pipeline) into FY25, but leave our forecasts unchanged, particularly given the possibility of a further (modest) FX headwind at the current GBP/USD rate.
There is a material valuation gap to peers, which should narrow as confidence in the outlook improves. We reiterate Buy, TP 800p.
Treatt (TET) has reported H124 results to 31 March. As reported in the April trading update, revenue declined by 5.1%, or by 2.7% at constant currency. This implies Q224 constant currency revenue growth of 7.7%, despite a tough comp of +14%. Revenue fell sharply in Q124 due to de-stocking, which was no longer a headwind in Q224. The return to growth in Q224 was volume-led, with some price impact where TET passed on raw material inflation (notably in citrus). It was helped by business wins in Premium products (e.g. branded tea in North America) and China. H124 revenue was £72.1m (H123 £76.0m), as reported in the trading update, and PBT £7.6m (H123 £7.3m), versus the guidance of “c.£7.5m”. Operating margin was up 120bps despite the decline in revenue and percentage gross margin (down 40bps), showing the strong control of costs. DPS was up 2.0%, slightly below EPS growth of 3.4%, and consistent with our full year forecast, as TET rebuilds dividend cover towards its 3x target. Recent trading has been strong, with a record sales performance in March. The outlook for H224 is positive, with a solid order book and healthy pipeline. Premium sales, which were strong in H1, tend to be H2-weighted, which bodes well for revenue and profit growth. The H1 margin improvement also bodes well for H2, when revenue growth should deliver positive operational leverage. TET’s PBT expectations are unchanged, as are our PBT forecasts. We reduce our FY24E revenue forecast by 2% to £152m. This implies 12% revenue growth in H224E, which should be achievable given TET’s strong momentum, and an easy comp given customer de-stocking in H223. The business wins that TET has achieved in branded tea in North America, and with major players in China, are encouraging for the long-term outlook.
The valuation gap to peers has reduced, but is still significant. This should narrow materially as confidence in the outlook improves. We reiterate our Buy rating and 800p TP.
Treatt (TET) has released an H124 trading update, covering the 6 months to 31 March. As a reminder, it reported a decline in revenue in Q124 due to customer de-stocking. Q224 saw a return to robust 7.7% constant currency growth, including a record month in March, despite being up against a tough comp of 14% constant currency revenue growth in Q223. Although we think that de-stocking ceased to be a headwind in Q224, we do not think that TET saw any net benefit from re-stocking, and that the stated revenue growth figure is therefore a good reflection of underlying trends. As previously disclosed, TET has not been seeking price increases as a matter of course in the period, meaning that this growth has been largely volume-led. Revenue growth in Q224 was helped by business wins in Premium products (notably with branded tea in North America) and in China (with new and existing partners). The return to revenue growth in Q2 left constant currency revenue down 2.7% in H124, which was consistent with our expectations (as set out in our last note). H124 PBT is expected to be c.£7.5m, up versus £7.3m in H123, despite the decline in revenue, showing the strong control of costs. The outlook for H224 is positive, with a solid order book and healthy pipeline. We would particularly note that premium sales, which were strong in H1, tend to be H2-weighted, which bodes well for revenue and profit growth. The margin improvement delivered in H1 also bodes well for H2, when revenue growth should deliver positive operational leverage. TET’s FY24 PBT expectations are unchanged, as are our forecasts.
Seriously cheap – The valuation gap between Treatt and peers is at extreme levels, reflecting some caution on short-term trading and UK smallcap discount. This should narrow materially as confidence in the outlook improves. We reiterate our Buy rating and 800p TP.
Croda has a strong corporate culture and has delivered organic growth and expanded through M&A. The business has a track record of value creation and a market cap of c.£7bn. We believe this appointment is a good fit for Treatt. We reiterate our Buy rating and 800p TP.
Treatt (TET) has released a Q124 trading update, covering the three months to 31 December, ahead of its AGM later today. As indicated at its FY23 results at the end of November, TET continued to experience customer de-stocking in Q124. It consequently saw a decline in revenue in the period, as had been expected. There are signs that this is now reversing, and TET consequently expects “demand to return to more normal levels in [fiscal] Q2”. This is also in line with its previous expectations. TET is “encouraged by current trading, underpinning our confidence in our trading performance for the year ahead”. TET is on track to meet our FY24 expectations, albeit with delivery weighted to H2, and we leave our forecasts unchanged. This includes an assumed single-digit revenue decline in H124E, more than offset by double-digit revenue growth in H224E, producing 5% revenue growth for FY24E. TET has reiterated its commitment to volume growth, which would help to drive operational leverage as it utilises the spare capacity provided by previous investment, most notably in the new UK site at Skyliner Way. TET notes that it has “a healthy pipeline of opportunities with both new and existing customers”, helped by its ability to support them in responding to consumer demand for healthier and more natural beverages. TET continues to focus on cash generation and expects a further fall in net debt in FY24. We forecast a fall in net debt from the £9.8m reported in FY23 to £3.7m in FY24, before moving to a £4.5m net cash position in FY25. TET currently trades on 19x FY25E PE, a 17% discount to its 10-year average of 22.8x.
Long-term potential – Treatt has >50% spare capacity and numerous growth opportunities. In addition, the main capex spend is done and net debt is reducing quickly. Sales have been held back in the short term by de-stocking but end-market demand continues to be robust. We reiterate our Buy rating and 800p TP.
Treatt’s FY23 results show a significantly improved y-o-y operating performance, delivering revenue and profit growth alongside record cash generation. Sales in H223 were affected by the destocking of inventory from clients, although management notes early signs of this reversing. Particularly strong growth came from Treatt’s new markets segment (Coffee, China and Treattzest), up 61% y-o-y. Record cash generation resulted in net debt more than halving to £10.4m. Management is focusing on volume growth in FY24 to deliver revenue growth of 5–7%, which is expected to be H2 weighted. Investment in sales and innovation will look to ensure future product growth while cost discipline and efficiencies should enable net operating margin expansion.
Treatt (TET) has reported its FY23 results to 30 September. It released a detailed trading update on 10 October, so there are no surprises. Revenue of £147.4m was in line with the guidance of c.£147m, and PBT of £17.3m was slightly ahead of the guidance of c.£17m. Net debt (including leases) of £10.4m was slightly better than the guidance of £10.5m. As flagged in the last trading update, TET experienced significant customer de-stocking in H223, mainly from the flavour houses, which constrained FY23 constant currency revenue growth to 3%. Value-added beverage volumes “declined moderately”, while commodity volumes “declined more significantly” because of TET’s previous strategic decision to shed some low-margin citrus volumes. However, the combination of strong pricing to recover inflation and tough action on costs (headcount fell by 14%, for example) allowed for 250bps of gross margin expansion and 110bps of operating margin expansion. As we have previously written, our best guess is that the de-stocking will start to reverse in calendar Q1, which would leave TET on track to meet our FY24 expectations, albeit with delivery weighted to H2. TET has reiterated its view that the investment in upgrading its facilities gives it “the opportunity to deliver improved operational leverage and gain further efficiencies…as the business continues to grow, utilising new capacity”. We expect this growth to come through strongly as TET uses its expertise to help its clients respond to consumer demand for healthier and more natural beverages. This remains the essence of the investment case.
Treatt’s FY23 trading update demonstrated a resilient performance despite the tougher trading environment towards the end of the year. Revenue growth of c 5% (to c £147m) has been driven by price increases, which have mitigated inflationary pressures and supported margins. Sales in H223 slowed due to destocking as clients reduced inventories, although management notes early signs that this is reversing. New markets (Coffee, China and Treattzest citrus) displayed particularly strong growth, with revenue up 60% to £16m. Cash generation was at a record high leading to net debt more than halving in a year to £10.5m (FY22: £22.4m).
The company's FY 23 trading statement reveals that de-stocking impacted on its H2 performance with revenue growth of 5% to c.£147m. The company indicate that de-stocking issues are starting to reverse and that it expects a return to volume growth in FY24e. Revised guidance for FY 24 and FY 25 mean
Long-term potential – Treatt has >50% spare capacity and numerous growth opportunities. In addition, the main capex spend is done and net debt is reducing quickly. The lower rating provides an excellent entry point.
Treatt (TET) has issued a trading update covering FY23 (to 30 September). Revenue growth was 5%, or 3% at constant currency. This implies a revenue decline of 4% in H2, or a decline of c.3% at constant currency. FY23 revenue is now expected to be c.£147m, 5% below our previous forecast of £154.9m. However, TET remains on track to meet FY23 profit expectations, guiding to c.£17m of PBT, in line with our (unchanged) forecast of £16.9m. This has been achieved, despite revenue being lower than previously expected, through price increases to offset cost inflation, strong cost discipline, and other self-help measures. This includes a 14% reduction in group headcount since September 2022, made possible by the move to the new UK facility. The reason for the H2 revenue decline is customer de-stocking, which has been widely seen elsewhere in the sector, most recently with Croda’s (N/R) profit warning only yesterday. TET’s high exposure to the beverages category, where consumer demand remains resilient, means that it has been affected later and less severely than many peers, but it was certainly affected in H2. How long de-stocking will persist is inevitably uncertain, but encouragingly TET is “seeing some early signs of a reversal of this temporary destocking effect”. Although this is likely to leave FY24 H2-weighted, with some further net de-stocking in Q1 and probably some re-stocking from Q2 onwards, we expect 7% revenue growth in FY24E, led by volume rather than price. Our FY24E PBT forecast remains unchanged at £18.9m. TET ended FY23 with net debt of £10.5m, almost £2m better than our forecast of £12.3m. With capex falling to more normal levels following the completion of the UK site move, we expect TET to move into a net cash position in FY25E.
Long-term potential – Treatt has >50% spare capacity and numerous growth opportunities. In addition, the main capex spend is done, and net debt is reducing quickly.
Long-term potential – Short-term trading is encouraging, but it is the long-term potential that is eye-catching. Treatt has >50% spare capacity and numerous growth opportunities. In addition, the main capex spend is done and net debt is reducing quickly.
Treatt’s H123 results demonstrate that the business is back to greater stability and resilience. The growth was particularly impressive in Citrus, Coffee and China, and management is quietly confident about the rest of the year. We continue to believe that risk lies to the upside in terms of market expectations. Growth in H1 was driven by price increases, which offset inflationary pressures and supported margins. Cost control and efficiency measures are ongoing, and cash flow was strong, as highlighted in the recent trading update, with improved net debt despite the traditional build of working capital at H1.
Treatt has reported its H123 results, covering the six months to 31 March. It had already released a detailed trading update, so there are no real surprises in the group numbers. H123 revenue growth was 14.6%, or 8.5% at constant currency. This implies Q223 revenue growth of 21%, or 14% at constant currency, reflecting the January price increases. Volumes were broadly flat in H1, excluding the voluntary ceding of some low-margin Citrus business. PBT was £7.3m (up 15%), slightly ahead of the £7.1m indicated in the trading update. Gross margin was +70bps, reflecting TET’s pricing power, a production process that is not energy-intensive, and the lack of packaging, with the latter two points enabling it to avoid some of the bigger cost inflation issues. Administrative costs were up 11% in constant currency, reflecting the investment in people and production facilities to support future expansion. TET does not expect further above-inflation increases and has been reducing headcount (down 7% since Sept-22). Operating margin was up 20bps. The strongest revenue performance by major category was Citrus (+33%), driven by value-added sales to existing FMCG beverage customers. This growth was despite TET deliberately shedding some low-margin business. Fruit & Vegetables (+23%), Health & Wellness (+3%) and Coffee (up fivefold from a low base) all grew. Tea was flat, with growth expected in H2. Volumes in Synthetic Aromas, which relate primarily to food ingredients, were down sharply due to customer de-stocking. However, the impact on profits was largely offset by price increases and lower costs, and volumes are expected to normalise in H2. Herbs, Spices & Florals revenue was down 10% due to raw material quality constraints, which are also expected to normalise in H2 (and price increases helped to maintain margins). China was the strongest market, with constant currency sales +37% in H1 despite only benefitting from one quarter of re-opening after the Covid lockdowns.
Long-term potential – Short-term trading is encouraging, but it is the long-term potential that is eye-catching. Treatt has >50% spare capacity and numerous growth opportunities. In addition, the main capex spend is done and net debt is reducing quickly. The next news is the 1H results on 9 May.
Meeting Notes - Apr 24 2023
TET HTWS RNK RAT BOCY ACSO AT/ BEZ ENT DATA IWG JUP NWG NFG QLT RWS TPK WTB OSB BOCH
After the usual slower start to the year, Treatt has had a strong Q2; H123 sales growth was 8.5% at constant currency. Momentum is expected to continue into H2, with current sales growth mainly skewed to price as Treatt continues to recover increased costs, though there was also a small contribution from an improvement in mix. Citrus continued to perform strongly as Treatt pursues its strategy of moving away from the lower-margin products. We raise our FY23 sales forecasts to reflect the strong revenue growth but leave our profit forecasts broadly unchanged at this stage, though we see upside risk to forecasts.
Treatt (TET) has released an H123 trading update, covering the 6 months to 31 March. As a reminder, it had already reported Q123 revenue growth of 9%, with constant currency growth of 3%. H123 revenue growth was 15%, or 8.5% at constant currency. This implies Q223 revenue growth of 21%, or 14% at constant currency. TET said at the Q123 stage that it expected faster revenue growth in the rest of the year, particularly as 1 January price increases started to have an impact. However, this Q2 growth was well ahead of our expectations and (along with a strong order book) augurs well for H2. We increase our FY23E revenue forecast by 3% (from £150.7m to £154.9m). We assume that price increases were by far the largest driver of the 8.5% constant currency revenue growth in H123, with some benefit from product mix and a small decline in overall volumes. Value-added beverage volumes were flat, reflecting the resilience of the category and some contract wins. However, TET deliberately shed some low-margin citrus volumes, and synthetic aromas volumes fell given that they are primarily sold into a food ingredients category which declined due to consumer de-stocking. H123 PBT was £7.1m, which implies EBIT of c.£7.6m assuming a net interest charge of £0.5m. This would imply a 10.0% operating margin, 10bps up on H122. This is a very resilient performance given the inflationary environment. It was helped by the strategic decision to shed some low-volume citrus volumes. We expect this to have more of an impact in H2, when we expect a 60bps operating margin improvement, giving a 30bps improvement for FY23E. Finally, TET reduced inventory levels by c.£7m, despite record high orange oil prices, reflecting the increased focus on working capital management.
Strong start – Treatt has had a strong 1H. We make no changes to our forecasts, but have increased confidence in our numbers.
Treatt’s AGM trading update suggests a more normal and steady pattern of trading has resumed, following the setbacks that caused the profit warning last August. Management has clearly taken rapid steps to address the issues that were identified, and indeed this was already evident in October’s FY22 pre-close trading update. Performance remains in line with management expectations and our forecasts are unchanged.
Treatt (TET) has released an AGM trading update covering its fiscal Q1, namely the three months to 31 December. This is TET’s smallest quarter in what is a seasonal business. Q123 sales were up 9%, with 3% from constant currency growth and 6% from FX. This was in line with management expectations and consistent with our FY23E revenue growth forecast of 7.5%. Although we expect the full year FX benefit to moderate, and volume growth to be modest, we expect price increases to have a more significant impact in Q2-Q4. TET’s contracts typically cover a calendar year, with price increases therefore applying from 1 January. We believe that TET has been successful in achieving price increases in Q123, reflecting the input cost pressures that it is facing. These will therefore start to benefit the top line in fiscal Q2. TET has cited Citrus as a category where it has achieved margin improvement on several key value-added products through its “procurement and pricing strategies”. With TET’s products being an important component of its customers’ products, but accounting for a relatively small proportion of their costs, it enjoys some pricing power which it is using judiciously to help protect its margins. This is being supported by strong control of its own costs. The “vast majority” of TET’s UK production has now transitioned to its new UK facility, with this process expected to be fully completed by this autumn (i.e. around the end of FY23). This will at least double TET’s UK production capacity, opening the possibility of significant positive operational leverage over time as it looks to capitalise on “a good pipeline of opportunities in new and existing customer partnerships”.
Treatt’s FY22 results were in line with the revised guidance issued in August. Management once again explained the steps that have been taken to improve processes around sales pricing and cost recovery, with new FX management systems already implemented. Coffee was reported as a standalone segment for the first time as revenues broke through £1m. While it is still early, the company expects coffee to provide significant growth in the years ahead. Management remains optimistic despite the dampened macroeconomic environment, as the market for natural and healthy products remains resilient. Our estimates are broadly unchanged.
Treatt has delivered FY22 results at the top end of the range indicated in its revised August guidance. The adjusted PBT was £15.3m (INVe £15.2m) and EPS 19.6p. The group closed the year with good revenue momentum, with sales up 12.8% to £140.2m (+9% on constant currency). Sales growth was achieved in all areas, with the exception of hard tea. Reported PBT was £16.2m after including an exceptional gain (property profit net of reorganisation/ moving costs). The FY dividend increased by 4.7% to 7.85p. The gross margin was 28.7%, down from FY21’s exceptional 34% for the reasons previously covered (FX hedging, the absence of hard tea revenue and inflation). Operating costs increased by c.12%, reflecting the investment made in the new site and staff. The resulting EBIT margin was 11.3%. The group closed the year with higher net debt reflecting the ongoing capex investment (now largely finished on the new UK site), but also a step up in working capital – some of this is due to inflation, but the group also increased stocks ahead of the transfer of manufacturing to the new site and to ensure availability given global supply chain issues. The group is expecting to return to growth in FY23 (6-8% sales growth guided). It has changed its FX hedging policy, thus is not expecting a repeat of the FY22 FX hit; in fact FX might be a small tailwind if current rates hold. We make no changes to our forecasts, with FY23E PBT of £16.9m, which is a £1.6m increase on FY22, but struck after sizeable headwinds - additional depreciation (£3m), some ongoing inflation (£1m+) and higher interest costs (c£0.5m). This is underpinned by its confidence in continuing to grow the top line, but with a better product mix, with growth favouring the value-added categories. We leave our FY24E forecasts unchanged too. BUY
Full year results as expected Full year results were at the top end of the Board’s revised expectations at £15.3m. Sales growth was 9% in constant currency and the adjusted operating margin reduced from 17.2% to 11.3% as expected. The new operations at Skyliner Way are now performing well, which provides significant additional capacity and potential for efficiencies. After a tough year, the company looks as though it is back on track with numerous growth opportunities. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Treatt’s FY22 trading update was in line with the reduced guidance issued on 15 August, ie adjusted PBT of £15–15.3m. Revenue growth of 13% is in line with market expectations and the dividend policy remains unchanged. Revenue growth spanned all categories with the exception of tea, as per the August statement. Health and Wellness and Synthetic Aroma witnessed particularly strong growth. The over-hedging, which was highlighted in August and caused part of the downgrade to profits, has now been corrected. While the economic environment remains uncertain, management is encouraged by prevailing consumer trends, particularly in beverages, and is hence confident that the business can revert to its trajectory of growth. Our forecasts are unchanged, with the exception of net debt, and our fair value remains 630p.
FY update and confident outlook Treatt has confirmed that FY PBT will be in line with guidance of £15.0m-£15.3m (our estimate is £15.0m including SBP). Revenue growth was 9% in constant currency, as expected. The company is well positioned to show strong growth given the investment in facilities and people, and there is a broad pipeline of opportunities. The beverage segment is recession resilient and Treatt should benefit from new business wins, operational gearing and currency movements. We see the recent share price reduction as providing an excellent entry point for a compelling long-term growth story. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Treatt updates on its FY22 performance, confirming that it is trading in line with previously issued guidance. It expects to deliver FY22 revenues of c.£140m, (+9% on constant currency) and PBT in the range of £15.0m to £15.3m. We make no changes to forecasts, including our assumption that profit growth resumes in FY23E. The revenue growth has been broadly based, with all areas ahead, with the exception of Tea, as communicated in August. This category we expect to be down by c.30%. The stronger growth has come from Citrus (+20%), Health & Wellness (+15%), Fruit & Vegetables (+8%) and Synthetic Aromas (+14%). With a different mix of business in FY22, the gross margin will be lower vs FY21. For the FY we expect a GM of c.28.5%. Operating expenses will be higher as a percentage of revenue, reflecting the recent investment in people, although these costs are expected to plateau now that this process is complete. Depreciation will, however, increase next year as the new site sees all manufacturing transferred across. The final distillation activities are expected to move across in summer 2023, as originally planned. The group reports that it has changed its FX management to be more frequent/ flexible, hedging the margin rather than revenue. The recent £/$ volatility has had no marked impact on the results, with translation benefits offsetting some additional transaction impact. Net debt closed the year higher at £23m, up from £9m. This reflects a tranche of UK capex, plus an outflow in working capital. Higher commodity costs account for some of this outflow, but the majority was a deliberate increase in stocks, in light of supply chain challenges. Stocks are expected to fall again next year.
US visit gives confidence in scale of potential upside We recently had the opportunity to visit Treatt’s operations in Florida and meet senior members of the management team, including the executive directors, sales, operations and innovation, as well as a customer. Our key takeaway was that we had underestimated the scale of opportunity for the US business across a number of categories. The visit also gave us an opportunity to assess the investment case in light of the recent issues (mainly hard tea and forex). We see the recent share price decline as providing an excellent entry point for a compelling long-term growth story. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 12-page note
Treatt’s unexpected trading statement of 15 August reduced FY22 pre-tax profit guidance to a range of £15.0–15.3m versus our previous forecast of £21.9m (pre-exceptional rather than normalised). The main drivers of the downgrade were lower sales in tea, driven by weak consumer confidence in the United States; over-hedging, which resulted in losses crystallising due to the devaluation of sterling against the US dollar; continued input cost inflation; and slower growth in China owing to ongoing COVID-19 restrictions. All categories excluding tea are showing strong momentum, and the company is taking active steps to limit its FX exposure and prevent over-hedging in future. Management remains confident in the long-term growth drivers for Treatt.
Profits below expectations Treatt has issued a trading update stating that profits will be between £15.0m and £15.3m for the year to September 2022, which compares to £20.9m last year and consensus of £21.7m. The key reasons are lower than expected sales of tea, currency movements, higher input costs and Covid restrictions in China. Much of this should prove temporary, so this should not materially change the longer-term outlook. Furthermore, the order book continues to look strong at +c.25%. Clearly this is disappointing short-term, but there continues to be plenty of potential, particularly with the benefits of the new facility at Bury St Edmunds. We have reduced our target price to 800p to reflect the lower expectations and lower comps. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Treatt has issued an update which reports it will fall short of market expectations in FY22. It guides PBT to a range of £15.0-15.3m vs our previous FY22E forecast of £21.6m. The group delivered lower 1H profits (vs a particularly strong 1H21) but had anticipated a stronger 2H. However, although profits in 2H will be higher vs 1H, they will fall short of previous expectations due to a combination of factors. Two factors - the performance in the tea category and some recent FX movements - account for the bulk of the revision in numbers. In FY21, the group saw a very strong tea revenue performance (+113%) and this is one of its higher margin lines. This has not repeated this year, as US consumer demand in this category has reduced, and also some new product launches have not succeeded. However, over a 2-year period, tea sales will still have increased by c60%. On FX, the group hedges its US sales but the recent weakness in sterling has given rise to some FX hedge losses (vs gains last year). Whilst the group would typically look to recover these in the end market, this can only be done as contracts renew and so it cannot be fully achieved prior to the approaching year end. Other headwinds have included the general inflationary backdrop, which has resulted in increased input/freight costs. Again, in due course, it will look to fully recover these costs as contracts renew. Finally, the continued lockdowns in China have resulted in lower sales growth than the group might have hoped. The new HQs performance is not an issue in this revision. The group has seen improved sales as it approaches period end, plus a continued strong order book. It will continue to drive a return from this investment (in assets and people) in the coming years.
Treatt has performed consistently well over the last few years, as it has moved from a commodity trading house to a partner and provider of advanced ingredients solutions. Following its successful expansion of capacity in the United States, it relocated its UK headquarters and manufacturing capability, with almost all staff now working from the new site. This should mark an inflection point for the business as the new facility is significantly more automated, allowing for greater efficiencies. Treatt is exposed to high-growth categories that are in the sweet spot of consumer preferences, such as sugar reduction, and reported at H122 that its order book is up 25% on last year. We maintain our forecasts and note that, as flagged by management, H2 is expected to witness both higher revenue and higher margins than H1, thus reverting to a more normal H1/H2 seasonal split after two years distorted by the COVID-19 pandemic.
A giant leap forwards Treatt hosted a CMD on Friday at its new Bury St Edmunds HQ and production site. It is an impressive facility and a massive improvement on the previous operations. The team’s enthusiasm was compelling, and this should turbo-charge Treatt in terms of new business, efficiencies and capacity. These benefits should start to be seen in 2H and increasingly apparent over the next couple of years. The company targets a 10-15% return on the c.£46m spend, which should prove conservative. The shares have sold off with the recent market turbulence, providing an attractive entry point, particularly as the company is now trading at a discount to international peers. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 6-page note
Last Friday, Treatt hosted its first ever CMD to showcase the new UK site. Having visited the old site too, we can validate the significant upgrade the group has achieved with this c£40m (net) investment. It is the final piece in the transformation of Treatt from “analogue to digital”. However, outshining the facility, in our view, was the quality of the people we met below board level. This is likely the reason why Treatt has punched above its weight in the flavours industry and has succeeded, regardless of its previous “outdated” facility. With this workforce, all of which were tangibly excited to be in the new HQ, and the new site, which brings everyone together under one roof (from 6 separate buildings) as well as showcasing the science led nature of the business, Treatt looks set to continue on its growth trajectory. There will be operational benefits from the new site (lower waste, less downtime from cleaning, and faster processing) which can be measured, but the impact on the top line from a more collaborative environment and greater interaction/leverage with customers is harder to estimate. However, the facility is definitely fit for the future and provides ample capacity to continue to grow. This site can ultimately treble production. The group is committed to increasing its R&D spend from the current 2% to closer to c 5% (industry average) over the next 5 years. Some of this will be “blue sky” R&D but some will be directed at developing new emerging products/sectors, such as premium cold brew coffee. There was no further comment on current trading – but in the recent 1H results the group confirmed its confidence in the full year outlook, despite the quieter 1H. With a 25% increase in the order book, the group has good visibility over the mix and scale of business expected in 2H.
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 has reported first half results in line with expectations. It had already indicated its revenue expectations in late April and today confirms the delivery of £66.3m in sales, which is a 9% increase on the prior half. At the same time, it flagged that profits would be more skewed to 2H. The PBT reported today is £6.3m, which is a 40% decline on last year but ahead of the result from 1H20. 1H21 enjoyed an unusually strong start to the year due to the switch in beverage sales to retail channels during COVID (retail is less seasonal vs on-trade). The interim dividend was increased by 25% to 2.50p. There was growth in 5 out of the group’s 6 categories, with only Tea showing a decline due to an especially strong pipeline fill last year. The stronger growth however came from the larger but lower-margin categories, which resulted in the gross margin falling to 27.5% vs 35% in 1H20. There were also higher opex costs as the company has continued to invest for the next stage of its development. Net debt closed the period at £19.8m which includes the proceeds for the sale of Northern Way, but also a working capital outflow of £15m. This reflects some timing of sales (March was strong), but mostly a higher inventory build as the group’s order book is showing an increase of over 25% on the prior 1H. We expect a cash inflow in 2H to reduce net debt to c£10m. This order book gives Treatt confidence over 2H sales and it increases its guidance to FY growth of 15%, which is c£3m above our old forecast. The mix of business is expected to move back towards the higher-margin categories so this will provide the boost in 2H profits suggested in our unchanged PBT forecast of £21.5m. The group remarks that it is on track to deliver consensus PBT (£21.7m). We leave our TP at 1260p and reiterate our BUY rating.
25% growth in order book 1H performance was as expected, with sales in constant currency +9% and profits returning to the normal seasonal bias. 2H has started well, and the 25% increase in the order book gives a good level of visibility. As a result, the company expects sales in constant currency to be +15% in the full year, and profits to be in line with expectations. Treatt is continuing to invest in people and facilities, which gives confidence that the company is set to deliver multiple years of strong growth. There will be an investor visit to the new Bury St Edmunds site on 27 May. We reiterate our Buy recommendation and 1,400p TP. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Treatt has continued to perform well, with the good business momentum continuing into H122. As previously flagged and as consumers emerge from the pandemic, the performance in FY22 is expected to return to more normal beverage trends, with H2 seasonally stronger than H1, and a shift back to on-trade beverage consumption. In addition, the higher-margin healthier living categories are also expected to perform better in H2, which will be reflected in the split of profitability. We raise our revenue forecasts to reflect the strong momentum, but our profit estimates remain broadly unchanged, due to mix considerations and cost inflation.
Strong momentum The company is continuing to deliver strong sales growth, with 1H expected to be +11% in constant currency, which builds on the 16% growth delivered in 1H last year. The order book is materially higher than last year, which gives confidence that the momentum will be at least maintained. There will be a return to the normal seasonal bias in profits this year as the impact of Covid diminishes. We continue to see Treatt as well set to deliver multi-years of strong growth given the investment in people and facilities. There will be an investor visit to the new Bury St Edmunds site on 27 May. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Treatt today updated the market on its 1H performance. It looks set to deliver good top line growth – guiding to c.9% despite a quieter (more typical) start to the period. The source of the growth is different this half, with stronger growth from citrus, synthetic aromas and herbs and spices. The growth continue to be underpinned by volumes rather than price. Although orange oil prices are higher, there is a lag in this feeding through to Treatt’s sales. We expect to see further 2H growth too, with the group reporting its order book is up 15%. Given the different 1H sales mix, Treatt is likely to report a lower gross margin, more akin to the GM delivered in FY20. On admin costs we have allowed for some general inflation. There has been some modest increase in depreciation, but this is likely to be more notable once manufacturing activities move across to the new HQ (May ‘22). FX has also been a headwind this half, creating a c.£1m (negative) swing HoH. Taking all of these factors into consideration, we anticipate Treatt will report a 1H PBT in the £6.0-6.5m range. With the strong order book, the group has increased inventory accordingly (it typically holds 6 months stock anyway to ensure a smooth supply chain for customers) and with higher orange oil prices this has added to the working capital outflow in 1H. As a result, the closing H1 debt will be around £20m, a £12m outflow. Some of this will reverse in 2H so we expect to see FY net debt closer to £10m than £20m. The proceeds from the sale of the old UK site have also been received in 1H. The group again flags that profits are likely to be significantly weighted to 2H as it did at the outset of the year. It anticipates the mix in 2H will move back to favour the higher margin categories and it is thus trading in line with its FY expectations.
As has become customary, Treatt has once again made a good start to the financial year and grown across multiple categories. This year’s adjusted PBT is likely to revert to a more normal H1/H2 weighting, as previously indicated by the company. This comes against a backdrop of an unusually strong H1 in the prior year. The move to the UK headquarters is progressing as planned. We leave our estimates unchanged at this early stage in the year, but note the board’s confident outlook.
Treatt has issued a brief trading update ahead of its AGM. Overall the Board remarks that it is looking forward to the remainder of this year (and beyond) with confidence. We are making no changes to forecasts at this early stage of the year. The company reports a good start to the period, with the order book up on the prior year. In November, however, the group did highlight that it expected to see a “more normal” seasonal split to the year. Q1 is typically the quietest quarter in the year, but the group had a particularly strong start to FY21 due to an acceleration in innovation following the easing of Covid restrictions. This resulted in an even split of profit between H1 and H2 in FY21, but this is not typical. This year, it anticipates returning to the more usual 40/60 split, and this would suggest that all of our forecast profit growth arises in 2H. All categories continue to perform well, although in Q1 the business was more dominated by the citrus and aroma categories, with the higher value added categories expected to start picking up in Q2 and Q3, in line with the seasonality of the north hemisphere beverage market. Whilst the wider market is struggling with inflationary pressures, this is not a significant factor for Treatt. It has seen some pockets of inflation, but it has a wide product range and each commodity has its own different pricing influence. It is used to dealing with volatility, whether it is caused by natural (weather) or other factors, and is well-versed in dealing with such issues. The group is carrying sufficient inventory to accommodate any supply chain issues. The transfer to the new site continues as planned and this will provide ample scope for expansion/ productivity improvements in the coming years.
Positive AGM statement Treatt continues to make excellent progress with the order book strongly up on last year, with numerous new business wins. The company is continuing to invest for growth, with the expansion of production facilities and recruitment in sales and innovation. This will provide additional growth opportunities as well as increased capacity and efficiency savings. The shares are trading at a similar valuation to international peers and look good value, in our opinion, given the growth potential. We maintain our Buy recommendation and 1,400p TP. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com
Treatt has once again posted a strong performance in FY21, delivering its ninth consecutive year of increased adjusted PBT. Healthier living remains an important driver of revenue and margin expansion, with group gross margins up an impressive 480bp during the year. Investment in the business continues, with the installation and commissioning of machinery at the new UK site expected by mid-2022, and the transfer of manufacturing equipment from the old facility to be completed by mid-2023. The total dividend per share was up 25% year-on-year to 7.5p.
Treatt delivered a superb year of growth. Adj PBT was £20.9m. While this was ahead of our latest forecast (INVE £20m), estimates have been rising through the year: our starting PBT forecast in Nov-20 was £15m. YOY the Group delivered a revenue advance of 14%, but PBT was up by 41%. EPS were 26.7p (fd) (+37%) and the full year dividend 7.5p (+25%). Whilst FY21 was an unusual year, the strong result was not COVID-led; if anything, total beverage consumption has been impacted by the pandemic. However, Treatt was swift to deploy its well-positioned range of ingredient solutions in the stronger retail channels. Healthier living categories (29% of sales) led the way with 64% growth. On a wider measure, non-citrus (56% of sales) grew by 29%. This move towards higher value added lines lifted the gross margin by 480bps, and the EBIT margin by 340bps to 17.2%. Debt increased to £8.1m (ex leases) in FY21 due to the heavy UK capex and investment in w/capital. Remaining capex (over the next 2 yrs) is smaller and will be mostly offset by the proceeds from the old site. There are some cash exceptionals to cover the move between the old and new facility. In October the Group opened its new UK HQ, marking the start of the next phase. With the new HQ it is investing more in higher skilled people and it plans to increase R&D to capitalise on emerging trends and new markets. As is usual at this early stage of the new fiscal year we make no changes to forecasts. The Group anticipates revenue progress across FY22 but does flag a return to the typical 2H weighting - Q1 last year was unusually strong so we might not see much 1H progress. We are reflecting increased operating costs (senior hires and new HQ depreciation) in our EBIT line, but still project profit growth.
Great results and great momentum Treatt had a stellar year, with sales growth of 18% at CER, and profits increasing 41% (c.5% ahead of forecast). Margins improved by 330bp, helped by operational gearing and product mix. The current order book is materially higher and we see numerous opportunities to drive growth. In particular, the new UK facility should deliver enhanced capabilities, capacity and efficiencies. We are not changing our forecasts at this stage, but see upside potential. The shares are trading at a similar valuation to international peers and look good value to us given the growth potential. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 3-page note
Treatt has had yet another strong year, with momentum in the business continuing. Revenue growth was 14% during the year, or 18% at constant currency, and was driven by continued strength in the healthier living segments, although slightly below our forecasts. Margins also continued to benefit from the positive mix as Treatt’s products increasingly move towards more value-added solutions. FY21 PBT is still expected to be in line with prior guidance.
Strong momentum going into the new year Treatt has had an exceptional year, with sales growth of 18% in constant currency and with an acceleration in 2H. Margins have improved, helped by operational gearing and product mix, with full-year profits expected to increase by close to 40%. The current order book is materially higher going into the new year and we see numerous opportunities to drive growth. In particular, the new UK facility should deliver enhanced capabilities, capacity and efficiencies. The shares are trading at a similar valuation to international peers and look good value given the growth potential. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Treatt has released a FY update confirming it has seen continued good momentum in 2H and that it expects to deliver FY21 PBT in line with its previously upgraded expectations (a record year with 36% PBT growth). The Group is also encouraged that the order book for the new FY is ahead yoy. As we are only 2 weeks into FY22, however, we make no changes to forecasts. Revenue will be c.£124m, which is 14% growth on FY20 (+18% on const. currency), again led by the healthier living categories, which in total grew by 64%. The strongest growth came from tea (+113%) which is now rebounding as the on-trade has reopened, but health and wellness was also ahead by 29%, whilst fruit & vegetables showed growth of 60%. The Group continues to see strong growth from the alcoholic seltzer market, despite some slowdown in the category itself. It has a broadly spread portfolio of customers which its serves directly and through the flavour houses. Citrus (44% of revenue) was largely unchanged in the year, but with a mix of value added lines driving the margin ahead. Whilst freight costs have been rising the Group is not majorly exposed due to compact shipment sizes, and it has prudently increased inventory to allow for some longer shipment times. The new UK HQ is open with many of the administrative staff now based there. The commissioning of plant and machinery for the manufacturing functions is underway and the majority of these operations should also be in situ by mid-2022. The most complex aspects of manufacturing will move across in mid-2023, completing the transfer. The old site has been sold for £5.5m. Net debt at the end of the year was in line with our expectations at c.£6m, after a further £9.5m of capex in the UK. .
Strong momentum continuing We expect the positive momentum from 1H to have continued in 2H and forecast c.15% sales growth in constant currency for the year to September. Improved mix and operating leverage are driving higher EBIT margins and we expect an improvement of 330bp to 18.0% in the full year. It is particularly notable that this improvement has come ahead of the new UK facility, which will materially increase capabilities, capacity and margins. Order books continue to be strong and the company is investing to drive further growth. The recent softness in the shares provides a good entry level, particularly as the company is now trading at a discount to key peers. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 2-page note
Treatt has once again demonstrated the strength of its business model, with another excellent set of results, and yet another upgrade to guidance. The performance continues to be testament to the management and culture of the business, which has been transformed under CEO Daemmon Reeve’s nine years at the helm. Both sales and profit performance are impressive, and we once again raise our forecasts, as the ‘healthier’ categories continue to outperform. The relocation of the UK business is under way, and we expect the business to continue to perform well once the new UK capacity comes on stream.
Extracting material upgrades H1 profits grew by 77% to £11.3m (excluding share-based payments) and were well ahead of our forecast of £8.9m. The positive momentum is continuing, with encouraging order books and further growth opportunities. We are increasing our 2021E EPS by 11% and 2022E by 8%. It is particularly notable that this improvement has come ahead of the new UK facility, which will materially increase capabilities, capacity and margins. We increase our target price from 1,000p to 1,400p and reiterate our Buy recommendation. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 4-page note
The Secret Sauce Investors regularly ask how Treatt is able to compete against much larger competitors and whether the business has IP that enables it to both grow its share of the market and strengthen margins. This note aims to shed some light on the competitive strengths of the business and demonstrate why it is a valuable asset. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 11-page note
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.
Confident of strong growth Treatt had an impressive H1 with sales +16% in constant currency, driven by its focus on natural products and consumer demand for healthier living. In addition, gross margins have improved due to mix and growth in higher added-value citrus ingredients. As a result, we forecast H1 profits to be +c.40% to £8.9m (pre share-based payments). We are not changing forecasts today, but see upside risk as the company continues to deliver both strong top-line performance and higher margins. We increase our target price from 975p to 1,000p. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com
Treatt’s half year update confirms that the strong start to trading this financial year has been maintained throughout the first six months. It reports that it expects to deliver c14% growth in H1 revenue to just below £61m. Within this total, most areas of the group’s portfolio are growing. The higher value add ranges of health & wellbeing, fruit & vegetables and tea continue to be the main driver, as product development favours clean labels/natural ingredients. Citrus has returned to modest growth, helped by a recovery to more normal orange oil prices. The synthetic aroma business (c20% of the group) also grew, with ingredients for meat alternative proteins/snacks a growing area. Only one area declined, herbs, spices & florals, with lower demand for essential oils from the carbonated beverage market (due to COVID). Gross margins stepped up through the course of last year on this improving mix, and 1H21 margins will be higher than 1H20. We are expecting the group to deliver a healthy double digit improvement in EBIT for 1H21E, with PBT likely to be c£9m (excl exceptional items), which would represent growth of c50%. As the operational fit-out of the new HQ is continuing apace, the transition to the new site will commence in a phased way from the end of this month. The first departments to move will be administrative, followed by the laboratories, with commissioning of the new plant and equipment to commence later in the calendar year. With the capex spend continuing, there was a cash outflow in 1H, resulting in half year net debt of £5m, still comfortably within the group’s borrowing facilities (of £27m). We increased our full year forecasts in January on positive commentary on momentum though 1H, so we make no further adjustment today. Incorporating higher peer EV/EBITDA multiples and rolling to a 12m forward basis, our TP rises to 1070p. We reiterate our Buy recommendation.
Treatt has once again delivered an exceptional performance in the first four months of FY21, with strong momentum across multiple categories contributing to growth. Operating margins have benefited from the improved product mix as Treatt continues to move up the value chain and partners with its customers to develop new products. Despite only being four months into the new financial year, the board is cautiously optimistic about continued growth and exceeding current market expectations. We raise our sales forecasts by 7–10% over the next three years and our operating profit and earnings forecasts by 20–32%. Our fair value also moves up to 870p.
Flywheel of success Treatt has had a strong start to the year and profits are expected to materially exceed expectations. Importantly, the strong sales performance has come across a broad range of categories and customers. These are typically in natural products, which are higher growth and higher margin. We are increasing our forecasts by c.20%, which leaves room for further upside, and increasing our target price from 775p to 975p. The new UK plant is due to be operating this summer, which will deliver a step-change in terms of capacity, capabilities and potential margins. We see Treatt as on a virtuous circle, where stronger growth is both delivering higher profits and funds to invest in additional capability and capacity. The company also has strong ESG credentials and Daemmon Reeve, the CEO, is presenting at our ESG conference next week. Charles.Hall@peelhunt.com, Andrew.Ford@peelhunt.com 4-page note
Treatt has updated the market on its first 4 months of FY21 trading. It had already remarked on a strong start to the year in the FY20 announcement, but this has accelerated, with profits for this 4–mth period strongly ahead. Whilst it is still early in the year, this very good trading to date and the visibility provided through the order book gives the group the confidence to report that it expects to materially exceed current market consensus (of PBT £15.1m for FY21). It does however flag that a degree of uncertainty remains from COVID – this has impacted some (hospitality-led) elements of its business, but to date this has been more than offset elsewhere (off-trade). FX and commodity risks remain, but these are always factors and Treatt has typically managed them well. Through FY20, despite challenges posed by COVID, the group continued to deliver on its strategy, growing its sales of value added ingredients. This was apparent in the improved EBIT margins (+180bps to 13.8%) last year. We had prudently not assumed a further margin improvement in FY21E, but we now believe this is likely given the group’s comment and it is one element in our upgrade. We also lift our FY revenue growth expectations from 5.5% to 13%. The growth YTD is broadly spread; the group reports further new contract wins plus strong organic growth in existing contracts, with its fruit & vegetables, health & wellness, citrus and tea all performing well. The group also flags continued progress in the global alcoholic seltzer market. Hence, our FY21E PBT increases by £3m to £18m. EPS lift from 19.9p to 23.8p (+20%). For FY22E, we assume continued progress. PBT increases by 25% to £20m with EPS of 26.7p (from 21.3p). Progress on the new HQ continues and the timetable is unchanged from that previous reported.
Treatt has performed well during FY20 despite the pandemic. There was strong momentum across the tea, health & wellness, and fruit & vegetables categories, and citrus markets recovered as expected. The strong growth across the non-citrus segments is resulting in a slightly reduced dependence on citrus (now 50% of sales). The UK relocation was slowed down as a result of the first lockdown, but the building work is now complete and the move will begin in mid-2021. While management report a strong start to the new financial year, the outlook is understandably uncertain: demand is not expected to return to normal levels before the end of FY21 or into FY22, though management is confident the business is in the best possible shape to face the uncertainty. The FY20 results demonstrate this, with a good cash performance and a 9% increase in dividends implying management’s confidence in the year ahead.
Treatt has delivered FY20 profits ahead of expectations after a strong close to the year. It reports PBT of £14.8m vs our forecast of £14m, with the difference arising from a stronger gross margin. EPS was ahead by c11% to 19.7p and the FY dividend +9% to 6.00p. Revenues were as previously reported, up c3% to £109m (cont. operations). However, the success of the new strategy is clearly apparent in the gross margin uplift from 25.4% to 29.2%. Operating expenses were also higher, reflecting new staff additions in the science and commercial teams. During the year, Citrus contributed a lower percentage of revenue with the shortfall more than offset by increased sales of higher-margin value-add products in Health & Wellness and Fruit & Vegetables. Also within the Citrus category, the group secured new value-added business within the fast growing alcoholic seltzer category. Whilst Covid added a layer of uncertainty and complication for all businesses, Treatt coped well, ensuring all facilities remained operational and service levels to customers were maintained. At the peak lockdown, there was some impact on the rate of new product introductions, but this is now recovering. The category worst affected by the closure of the hospitality channel was Tea which had grown strongly in 1H, but closed the year just 3% ahead. Capex continued. The new US capacity was operational in FY20 and the UK building is now complete. Covid caused some modest delay, but the aim is to start the relocation in mid-2021 once the fit-out completes. The delay preserved cash and Treatt closed FY20 with £1.1m cash. FY21 starts with good momentum, but we leave forecasts unchanged as we are only 7 weeks into the year and still face uncertainty from Covid/Brexit.
Treatt has had another successful year, and the COVID-19 pandemic so far has not materially affected trading performance. The sharp fall in citrus prices has had an impact on revenue growth, which is down 3% at constant currency for FY20. However, profit performance was strong as there was good growth in the other parts of the business, with health & wellness and fruit & vegetables posting double-digit revenue growth, and with the higher-margin parts of the business continuing to outperform. The UK relocation project continues, with construction nearing completion and a move to the new site expected in spring 2021, and the outlook for FY21 is cautiously optimistic. Our fair value increases to 670p (from 560p).
Treatt demonstrated its strength and resilience in H120, as so far the COVID-19 pandemic has not had any adverse impact on trading performance. Of course, this is in part due to the categories in which Treatt operates, with some of its products being used in household cleaners, which have witnessed a global spike in demand. Nevertheless, the steady performance is testament to the management and culture of the business, which have been able to withstand the unexpected and exogenous shock. H219 and H120 were affected by a global weakness in citrus raw material prices, which in turn affected revenue growth. Citrus prices have now started to firm and we expect growth in this category to return in H2. We leave our forecasts mostly unchanged but roll forward our DCF and hence our fair value rises to 560p (from 530p previously).
The benefits from the group’s previous efforts to diversify the portfolio are clearly apparent in the 1H results, with profits of £6.1m largely withstanding significant price deflation in Citrus (50% of group revenue). The higher growth (and higher value added) categories (tea, health & wellness, fruit & vegetables) together delivered growth of 7.2%, playing a part in the 120bps increase in the gross margin. The geographic split was affected by lower citrus prices, with the UK and Europe the main markets exposed to citrus. Covid-19 only really started to become widespread towards the end of the group’s 1H period, but overall has had little impact on the business, apart from in China which was the worst affected region in 1H. So far in 2H, the group has continued to see strong demand for premium beverage products. It is mindful that Covid-19 may create some slowdown in beverage new product development, but the group is encouraged by its order book, including solutions for hand soaps and cleaning products. Its manufacturing facilities are both fully operational, whilst safeguarding staff safety. The group closed the half year with net cash of £6m after spending £11.9m on capex, £8.6m of which was for the UK HQ. Whilst the project is (understandably) running a little behind, the building is now in the latter stages of construction and it is aiming to relocate in FY21. With some capex expected to slip into FY21 (perhaps up to £10m largely for plant and equipment), we anticipate the group will close this year with minimal net debt, which is a comfortable situation in the current climate. No changes to forecasts. 2H will see improving margins from higher citrus prices and China is also now opening up. Although there is no negative Covid-19 evidence, we flag that it poses uncertainty for the balance of the year.
Treatt has had another successful half year, and the COVID-19 pandemic has, to date, had no adverse effect on the business. As previously stated, the sharp fall in citrus prices during FY19 has continued into H120, hence H1 revenue is down 5.6% at constant currency. There was good growth in the other parts of the business, with tea and health & wellness as the standout performers. Building work on the new UK site has slowed due to the COVID-19 pandemic, and at this stage guidance is for relocation to be in 2021, ie a c three- to six-month delay vs previous guidance of Q420. Our forecasts and fair value remain unchanged at 530p.
As Treatt closes its 1H, it has issued an update indicating it is currently trading in line with expectations. To date, COVID-19 has not had any adverse effect on the trading performance of Treatt. We make no changes to FY estimates. Citrus prices have remained weak through 1H (as expected) and this has continued to influence the top-line performance (citrus revenue was down c15%). The group reports a 5.1% decline overall, but this masks continued strong progress in the key areas of tea (+47.5%), fruit & vegetables (+9.7%) and health & wellness (+19.9%). Actions have been taken to protect all of its employees, with some working remotely where possible, but both manufacturing facilities remain operational. The extended US facility is now fully operational adding valuable extra capacity in time for spring crops. The group closed the half year with net cash of £6.5m and most of its total bank facility (of £25m) remains undrawn. Work is continuing on the construction of the new HQ, but some elements of this project are likely to be delayed. The anticipated cash outflow for 2H may well be slower than expected, but for now we leave our FY UK capex assumption at £32m. The group’s order book/current demand is encouraging as the group moves to its peak trading. This should be better reflected in 2H revenues too as citrus prices firm. Of course, the group has to caveat the outlook due to COVID-19. However, whilst some of the group’s business is driven by new product development, which might be delayed by the current situation, the bulk of revenue is derived from sales of products already in the market. In terms of 1H, we expect a resilient profit performance, despite deflationary pressure on citrus margins. However, this should reverse in 2H, so we anticipate that profits will be 2H weighted this year.
2019 proved to be more challenging than Treatt had expected with the group encountering sharp price deflation in citrus products and forex headwinds. However, despite these issues, it still delivered a solid 5% profit increase over the prior year. The diversification into new higher value added areas, such as tea, health & wellness and fruit & vegetables, has helped the group decouple profits from citrus prices. Revenues from these areas grew by a healthy 16% and they also helped lift the gross margin. Following completion of the US capacity addition, the group has ample headroom to continue to drive these products, as well as invest in new categories such as coffee. The UK relocation project is now underway. With the main contractors appointed, the build has commenced and the group hopes to start the transfer of production and offices at the end 2020 and into 2021. Ahead of the major spend this year, the balance sheet is in good shape with £16m of net cash. With £32m of capex expected in FY20 on the UK project, the group will move into a modest net debt position by the end of the year. With some annualised deflationary impact expected in FY20, we have been prudent on our revenue projections, but we do expect to see growth accelerate into FY21E as the new site comes into operation. This will offer a step change in customer experience and it is also expected to help improve margins as the new technology on the site reduces production costs. We make no changes to forecasts in this note, but we do review our target price to update it for current peer multiples. It increases from 525p to 550p and we reiterate our BUY recommendation.
Treatt’s FY19 results are testament to the resilience of the business: despite a 10% revenue decline in the citrus segment – caused by a sharp fall in citrus input prices – 16% growth in Treatt’s broadened portfolio of non-citrus revenues resulted in overall reported revenue up 0.5% (-2% at constant currency), in line with our estimates. The key non-citrus categories of tea, health & wellness and fruit & vegetables continue to perform exceptionally well and the company has recently entered the coffee space, which is expected to provide further growth opportunities. Management’s outlook for FY20 is positive, despite citrus pricing continuing to show weakness. Our fair value remains unchanged at 530p.
Treatt has delivered profits a shade ahead of expectations, with an adj PBT of £13.3m vs our forecast of £13.2m. This was a 5.2% increase on the prior year and was achieved despite lower prices in citrus (-£1.8m on gross profit) and FX headwinds (-£0.8m). Adjusted EPS (fd) for the continuing businesses were flat yoy at 17.6p, after taking into consideration the higher number of shares in issue. The full year dividend was 5.50p (+7.8%). There were some modest losses below the line for a business in Kenya, now treated as discontinued. The group had already issued guidance on its revenues in the pre close and these showed only modest progress of 0.5% (or a small decline of 1.9% in constant currency). However, this was a blend of a 9.9% decline in citrus revenues (54% of the group) due to orange/lemon oil price deflation, and 16.3% growth in non-citrus products. Tea, health & wellness and fruit & vegetables remained key growth areas. Growth in these newer markets has helped the group better manage the volatility in citrus and, as they are higher margin products, this helped lift the gross margin by 70bps to 25.4%. The group’s cashflow was strong in the year, with a £5.9m inflow assisted by a £4m improvement in working capital. This resulted in net cash balances of £16m at the year end. Capex was a little over £10m, primarily reflecting the US expansion plus some modest outlay in the UK. The bulk of the UK (new HQ) spend will fall into FY20. We are forecasting £33.5m for capex in FY20E and hence we expect to see the group move into a net debt position. The group remarks it is trading in line with expectations at this early stage of the year. It sees continued opportunities in the US, with the increased capacity, as well as in China where it has seen good traction. We make no changes to forecasts.
Treatt has had another successful year: notwithstanding the decline in citrus prices, revenues were up 0.5%, or down 2% at constant currency. This demonstrates the transformation that has occurred at the company over the last few years, from a commodity trading house to a provider of value-added, technical flavour and fragrance solutions. While orange oil prices were down 50% and revenue from the citrus category was down 10%, Treatt’s broadened portfolio was able to withstand the decline by registering significant growth elsewhere, notably in tea, health & wellness and fruit & vegetables. Management’s outlook for FY20 is positive, despite citrus pricing continuing to have an adverse effect.
Kaspi.kz, the largest Payments, Marketplace and Fintech Ecosystem in Kazakhstan with a leading market share in each of its key products and services. GDR offering expected Oct 2019. In the first half of 2019, the Company generated total revenue of KZT226,862m (U.S. $598m), up 34% and net income of KZT77,001m (U.S. $203m), up 54%. Registration document approved for Helios Towers. The Group provides essential network services, flexible infrastructure solutions and reliable power supply to mobile network operators in five African growth economies. Revenue increased 7 per cent. year-on-year to US$191m (H1 2018: US$178m), with Adjusted EBITDA up 15 per cent. year-on-year at US$99m (H1 2018: US$86m) for the six months ended 30 June 2019. Pricing rumoured at 115p to 145p implying valuation of up to $1.8bn
TET CERP BEM AGL SUR SRT CORO BOOM BST BIRD
Treatt has issued a pre close statement for FY19. It expects to report PBT (adj) in line with its expectations. We make no changes to our FY19E forecasts. In the year, the group has seen increasing deflation in some of its key raw materials, in particular citrus oils (orange oil prices are down by more than 50%). Citrus revenues (54% of group) will be down 10%, but offset by good progress in other key areas of tea (+42%), health & wellness/sugar replacement (+23%), and fruit & vegetables (+35%). Overall, citrus has impacted the revenue line by -5%, so reported revenues will show only a 1% increase to £112.7m. The group is well practised in dealing with such raw material fluctuations and has been able to protect profitability. Across the year, FX movements have also been negative – by c£600k - so to deliver a forecast increase in PBT of 5% is a solid result. The group typically benefits from a strong dollar, so, if rates remain at current levels, this should be a helpful factor in FY20. Cash performance has been strong, with net cash of £15.8m at y/end. This was an inflow of £5.8m, after the US capex, but was assisted by favourable w/cap. During the year, the group completed its capacity expansion in the USA and recently announced the appointment of the main contractor for the new UK HQ. Building work should be underway soon, scheduled to complete in summer 2020. This is c. 6mths behind the original timing, and the transition between the old and new sites will run into FY21. We marginally tweak our FY21E numbers to reflect this, reducing PBT by 2% from £15.35m to £15.05m.
Contractor signed Treatt reports it has signed a construction agreement with developers for its new HQ in Suffolk Park, Bury St Edmunds. The fixed price (design and build) contract is with Readie Construction Ltd and the building is scheduled to be completed by summer 2020. Negotiations for the plant and machinery are also proceeding well. Great clarity on budget This gives the group more visibility over the capex cost. It is reported as £33.2m, net of the old site proceeds of c£5m which will likely only be realised in 2021/22 once the whole relocation is complete. Some of this budget has already been spent (land costs of £3.8m fell in FY18) and the balance was already reflected in our cashflow forecasts. However, there will be much less falling in FY19E (only £2m) than we had originally pencilled in, with the difference moving to FY20E (c£32m). Other costs The group also highlights some additional one-off costs for relocation/accelerated depreciation etc which will be largely treated as exceptionals. The group expects these outstanding costs to total c.£3.5m and again they were already reflected in our cashflow forecast. We still anticipate net debt peaking at end FY20E, but it should not exceed c£14m, so comfortably under 1x EBITDA (working cap fluctuations aside).
Treatt continues its transformation from a trading house to a provider of value-added, technical flavour and fragrance solutions. Its core categories of citrus, tea and sugar reduction continue to drive profit growth. After several years of raw material price inflation, the company is experiencing some falling prices, particularly in citrus. Citrus is Treatt’s historical area of strength and expertise: it represents c 50% of company revenues and the company has demonstrated longstanding skills in managing input prices over many decades. Raw material prices are cyclical, and whilst raw material price deflation tends to result in softer pricing, it does not necessarily cause a fall in profits. We leave our forecasts broadly unchanged and believe the current share price offers a good entry point considering our fair value of 517p (unchanged).
Treatt has delivered another period of strong revenue and profit growth, demonstrating its transformation from a trading house to a provider of value-added, technical flavour and fragrance solutions. Its key categories of citrus, tea and sugar-reduction continue to drive profit growth. After a few years of increasing raw material costs, Treatt is experiencing some falling prices, particularly in citrus. Citrus represents c 50% of company revenues – and Treatt’s historical area of expertise – and falling raw material prices tend to result in selling price deflation. Crucially, they do not necessarily result in a fall in profits, as due to timing of contracts, the fall in raw material costs is not always fully passed onto customers. We trim our FY19 and FY20 sales forecasts in light of raw material deflation, but we leave our profit forecasts broadly unchanged. Our fair value moves to 517p (from 510p) as we roll forward our DCF to commence in 2020.
The last few years have seen Treatt grow at a spectacular rate, and although – as expected – the growth has moderated, it demonstrates that momentum persists in the business, and management has continued to build on prior growth despite the demanding comparatives. Revenues were up by 7% in H119, or 5% at constant currency, vs revenues up 10% in H118. The key categories of fruit and vegetables, tea and sugar-reduction continue to drive the business. Citrus remains the largest category, though at present it is witnessing some weakness due to lower raw material prices. Nevertheless, the rest of the business continues to grow, and management’s outlook for FY19 remains unchanged.
Treatt has reported yet another set of strong results in FY18. The company remains in the sweet spot of current consumer trends, with ingredients that help to deliver better-for-you products with clean labels and without compromising on taste. The US expansion is on track and on budget, and will be fully operational in H119. The UK relocation is progressing well, although it is more complex and the timetable has slipped by about six months. FY19 has started well, and at this stage we leave our estimates broadly unchanged. Our DCF-derived fair value remains 510p.
The FY18 trading update confirms that momentum continues to drive Treatt’s business. Following the exceptional results posted throughout FY17, Treatt witnessed like-for-like revenue growth of 10% in H118, and 9% for FY18, suggesting some deceleration in H2. Growth remains broad-based, with all core categories contributing, and demonstrating that the business is well-placed to capitalise on current trends in the food and beverage space. Management’s outlook and expectations for the year remain unchanged, but we trim our forecasts to reflect gross margin headwinds.
Treatt has transformed itself from a commodity-based ingredients company into a supplier of value-added ingredients and ingredient solutions. The previous strategy was delivered three years ahead of target, following a stellar FY17, and the new strategy introduced last September builds on the strong momentum in the business, which has seen five consecutive years of earnings above company expectations. Our DCF analysis points to a value of 540p/share, supported by peer group analysis that places the stock at a c 10% discount to its competitors.
Following the exceptional results Treatt posted in FY17, momentum has continued in the business and revenues were up c 10% in H1. The core categories of citrus, tea and sugar reduction continue to drive the business, demonstrating that the company is well placed to capitalise on current trends in the food and beverage space: management’s outlook for FY18 remains unchanged. H1 will suffer from slightly negative FX effects, but US tax reform should lead to a significantly lower tax rate in future. We leave our forecasts unchanged at this stage, but see upside to our EPS forecasts from the lower tax rate, which remains unquantified at present.
Treatt has posted yet another year of excellent growth, with revenues up 25% and adjusted PBT up c 45%. The company has reached its FY20 financial objectives three years early, and the management has therefore updated its strategy to take the company through to the next phase. A new facility is being built in the UK, and the US site is being expanded. Both projects are on track and Treatt has now announced a share placing to fund these projects. This was always flagged as a possibility. We update our forecasts to reflect the FY17 results and the share placement. Our fair value is 515p (from 522p previously).
Treatt has had yet another outstanding year, continuously exceeding expectations and meeting its 2020 strategic objectives three years early. The board has already approved a plan to drive the business through to 2022 that seeks to build on this success. We raise our EPS forecasts by 3% in FY17 to reflect the strong performance, though our FY18 and FY19 EPS estimates fall by 1-7% due to higher interest costs. Our DCF-derived fair value increases to 522p from 438p, which represents c 10% upside.
Treatt has delivered yet another strong set of results. The business continues to perform very well and the constant stream of upgrades demonstrates the strength of momentum as the company moves further up the value chain. The pipeline is looking increasingly strong and recent growth means capacity expansion costing $11-14m is required at Treatt USA and is independent of the UK site relocation. We upgrade our FY18 and FY19 earnings estimates by c 2% and c 4%, respectively.
Despite the surprise trading statement of 23 February, which led us to raise our sales forecasts by c 10% and PBT and EPS by c 20-30%, Treatt has yet again upgraded its outlook for FY17, which leads us to raise our EPS forecasts again by c 6-9%. Our fair value increases to 401p (from 350p) as a result. The constant stream of upgrades demonstrates the strength of momentum in the business as the company moves further up the value chain.
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.
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.
Treatt has had an outstanding year as the positive trends in its markets continue to play out. We believe the company is building a strong platform for the longer term and the performance continues to improve as the strategy progresses under the stewardship of Daemmon Reeve. Following the pre-close trading update, we upgrade our forecasts by c 10% at the EPS level to reflect the improved outlook. Our DCF-derived fair value increases to 240p (from 204p), which represents c 10% upside.
While the quarter modestly trailed our expectations, Trilogy’s spending represented only 11% of cash flow while reining in operating costs, and observing only modest production declines which should situate the Company well for 2H16e where more drilling activity is planned. With this release, we have made no material changes to our estimates, though note that operational catalysts will be ramping up in 2H16e. Sustained improvements to drilling costs may lead to a bump to our reinvestment efficiencies as more capital is deployed throughout the year. We are increasing our 12 month target price to $6.00 per share while electing to maintain our Market Perform ranking on the stock.
Impact: Neutral. While the quarter trailed our expectations, Trilogy has managed to hold spending under cash flow while reining in operating costs, which should situate the Company well for 2H16e where more drilling activity is planned.
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.
Impact: Neutral to slightly negative. The re-determination to $300 mm removes some margin of error for Trilogy and brings total borrowing capacity closer to our net debt estimate exiting 2Q16e, which is not ideal. That being said, our current estimates have Trilogy spending at or below cash flow for the remainder of the year on both FirstEnergy and current forward strip pricing, which should assist with deleveraging efforts moving into 2017e.
Given natural declines and voluntary shut-in of uneconomic production, Trilogy’s production was 2% shy of our expectations, alongside a slightly higher natural gas bias. Cash flow of $9.1 mm or $0.07 per share was behind FirstEnergy and consensus estimates of $0.10 per share. Capital spending of $22.3 mm outpaced cash flow as the Company addressed expiry issues in the Duvernay while taking advantage of notably improving well costs in its Montney oil and gas plays.
Trilogy’s 4Q15 production was 4% lower than an cipated at 24,172 boe/d, however cashflow (net of one-time items) was in line with our expectations. Reserve growth per share was 13% and F&D was $14.09/boe on a 2P basis with Management elec ng to book an expanded 5-year development program, largely due to improved production history and further well control in key plays. PDP reserves decreased 20% per share y/y. With only minor changes to our proforma outlook and thesis on the evolution of its core assets, we are maintaining our Market Perform ranking and target price of $3.75.
Treatt’s portfolio of natural, organic and fair-trade ingredients lies in the sweet spot of global food and beverage industry growth. Its strategy to deliver consistent growth by developing value-added ingredient solutions, coupled with strict cost control, is being achieved. Our DCF analysis calculates a 190p share price, 13% upside, supported by benchmark analysis showing the stock at a c 40% discount to its peer group.
Impact: Positive as this sale came in at compelling metrics and will allow Trilogy to pay down debt in the near term without adversely affecting the longer term growth prospects of the Company while also reducing its capital commitments over the remainder of 2015e and 2016e. Additionally the Company will be able to focus on 100% working interest projects in the Duvernay and Montney (Kaybob oil and Presley gas) projects in 2016e where the pace of development will be at the sole discretion of the Company.
Treatt is on track to deliver another period of growth as the positive trends – in the beverages market in particular – continue to play out. We believe the company is building a strong platform for the longer term. Despite the slow start to the year, momentum built steadily, culminating in a strong Q4. Our DCF-derived fair value is 198p, which represents c 20% upside.
In a relatively quiet quarter of operations that saw production roll back 12% q/q, Trilogy reported 2Q15 results that were slightly behind our expectations on both a cash flow and production basis, however generally aligned with the consensus forecast for the period. The upside of the modest capital undertaking was that cash flow outstripped spending by just over $20 mm, which, when augmented by a non-core Kaybob Dunvegan asset sale ($45 mm) in early 3Q15e, does provide a much needed quarter of deleveraging.
We had the pleasure of hosting Trilogy Management for an update, where items discussed included: the corporate 5-year plan, current and planned activity levels, project economics, and the official renewal of its bank line and associated revised terms.
Trilogy reported 1Q15e results that were in line on a production basis, but beat estimates on a cash fl ow basis with the help of a one-time item augmenting normal operational cash fl ow. Normalizing quarterly cash fl ow would still highlight Trilogy outperforming both FirstEnergy and consensus estimates; however, capital expenditures during the quarter was 89% higher than our forecast and represented nearly half of its full year budget for 2015e.
Impact: Neutral. The Company's production was in line with our estimates, however cash flow was meaningfully ahead, largely due to a one-time item. Normalizing for this the Company's cash flow was marginally higher than FirstEnergy and consensus estimates. The Company spent nearly double than we had anticipated during the quarter which continues to frame a challenging run rate D/CF ratio of 5.6x, particularly with no meaningful production growth on the horizon.
