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).
FY17 was a record year for the company, with revenues topping £100m for the first time (£109.6m), adjusted PBT of £12.9m and EPS of 18.3p on a company adjusted basis. The growth rate achieved in FY17 will be hard to replicate and should not be considered the new norm, but it does demonstrate the company is successfully embracing the sweet spot in flavour ingredients. We note management’s comments that FY18 has started well, and the growth in FY17 was broad-based – both in terms of geography and product mix – which sets a good base for the future.
Treatt’s new strategy is an evolution of the previous one. The focus remains on the company’s core areas of citrus, tea and sugar reduction. The theme of deep customer relationships continues: this has served the company well and should further help to speed up the innovation and success rate with its customers. The management is also focused on enhancing the company’s technical abilities to drive the business forward through product innovation and operational efficiencies, which in turn should drive margin expansion. The UK relocation and US expansion will help achieve these objectives.
We value Treatt using a DCF model, which now indicates a fair value of 515p (previously 522p), an attractive c 7% upside to the current share price. We have incorporated the share placement into our forecasts, hence reducing our net debt and increasing the number of shares. We have assumed net proceeds of c £22m. Treatt trades at 24.6x and 14.8x calendar P/E and EV/EBITDA multiples for 2018, representing discounts of c 15% and 20% to its ingredients peer group, respectively. Given the current growth trajectory of the business, and our forecast for low double-digit CAGR EPS for 2016-20, we believe this level of discount is unwarranted.