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 strong growth over the last few years caused a need for an expansion of capacity at Treatt’s US facility. The increase will be substantial, adding over 80% of prior capacity, and the project has so far been delivered on time and on budget, which is testament to management’s disciplined approach. The UK relocation is more significant and more complex. The design phase has taken longer than expected, hence the slippage in the timetable. We note the overall cost has crept up over time, but this is in part due to management’s decision rightly to hold back capital investment at the old facility, hence there is a degree of catch-up on the new facility.
Increased raw material costs and some pricing pressure on new business wins resulted in gross margins falling c 20bp in FY18. Adverse FX movements were also unhelpful. As expected, a large increase in working capital is attributable to timing issues and increased costs, but also to longer payment terms with a number of larger customers. Following the equity raise in November 2017, the balance sheet remains well-funded with a net cash position of £10.1m at end September 2018.
We value Treatt using a DCF model, which indicates a fair value of 510p (unchanged). Treatt trades at 22.0 FY19e P/E and 16.9x FY19e EV/EBITDA. On P/E it trades at a c 20% discount to its peer group, and on EV/EBITDA it is at a c 5% discount.