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Treatt has all the ingredients for upside
Flavour and fragrance specialist Treatt (TET) has many ingredients of a high quality company. Guided by management with a pedigree in under-promising and over-delivering, low risk organic growth looks sustainable.
WHAT DOES IT DO?
Bury St Edmunds-based Treatt provides innovative ingredient solutions to the flavours, fragrance and cosmetics industries and to consumer goods companies.
The £133m cap’s ingredient solutions are used by food ingredients companies within their formulations and by food and drink companies directly; typical end-products using Treatt’s ingredients include soft drinks, craft beers, confectionery, soaps and shampoos.
Competitive strengths include Treatt’s experience in sourcing and trading raw materials and its long-term and deepening relationships with customers. Since taking over in 2012, CEO Daemmon Reeve has transformed the business from a seller of flavour and fragrance-based commodities to a value added, higher margin ingredients supplier.
Treatt is a play on the growing clamour for products with better health credentials, many of which make use of its specialist ingredients.
With manufacturing sites in the UK, US and Kenya, a key growth driver for Treatt is beverages. This is a defensive sector seeing trends towards natural, clean label and calorie-free products. Sugar reduction is a focus for drinks customers. They work closely alongside Treatt’s laboratory technicians, helping forge closer relationships.
Geographical exposure by revenue is diverse; the US is Treatt’s biggest market, followed by the UK. China represents a major long-term growth opportunity.
Record results for the year to September 2016 revealed an improvement in return on capital employed to 24.6% (2015: 22.1%).
Free cash flow grew to £8m from £6.2m, while the net operating margin nudged higher to 10.8%. Net debt fell from (£6.2m to £1.7m. This is an 11 year low and was achieved in spite of increases in key raw material costs such as orange oil and sterling depreciation against the US dollar.
One point to note is that Treatt has outgrown its Bury St Edmunds site and plans a costly relocation nearby. Research house Edison says the resulting £21m to £31m cash outflow over a two-to-three year period can be funded from existing facilities.
Edison forecasts £10.3m pre-tax profit in 2017 and £10.6m
TREATT (TET) 258.93p
Stop loss: 207.14p
Market value: £133m