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 $14m expansion of the existing US facility was completed on schedule in March and will be fully operational in June. It brings significant additional capacity in non-citrus. The UK project is more complex; planning consent has been obtained, and construction is due to commence in the summer, with occupancy to begin in Q420.
The resilience of Treatt’s profits despite input cost deflation demonstrates how far the business has moved from its commoditised origins. Its key categories continue to be important drivers of both the top line and margin, but its other categories continue to grow, as witnessed by the natural fruit and vegetables category during H119. The company falls into a niche as it provides top-end innovation in beverages solutions, while also directly providing beverages ingredients. The majority of its products can be classified as natural or clean-label. Treatt’s portfolio is well-suited to the current consumer trends of clean labels and more natural, better-for-you products.
Our DCF-derived fair value is 517p/share (previously 510p; we have rolled forward our DCF to commence in 2020), c 27% upside to the current share price. Our DCF is supported by Treatt’s benchmark valuation, with the shares trading at 22.4x FY19 P/E and 16.4x EV/EBITDA, representing a 21% and 12% discount to the ingredients peer group, respectively.