We think that shares in extracts-to-ingredients supplier Treatt (TET) can maintain the momentum they have shown since the market bottomed in March.

Under chief executive Daemmon Reeve, Treatt’s margins are improving thanks to a focus on added-value products and the company is primed to profit from consumer trends including a preference for natural products, the growing interest in health and wellness, as well as premiumisation.

TRUST IN TREATT

Treatt makes and supplies a diverse portfolio of natural extracts and ingredients for the flavour, fragrance and multinational consumer product industries, particularly in the beverage sector.

In a year-end update (9 Oct), Treatt guided towards a modest annual profits rise and reassured it would pay a final dividend. For the year to September 2020, Edison forecasts improved adjusted pre-tax profits of £14.7 million (2019: £14 million), rising to £15.8 million this year for earnings of 20.3p, placing Treatt on a prospective price-to-earnings ratio of 29.9. The paid-for research house expects a 5.8p dividend for fiscal 2020 (2019: 5.5p), rising to 6.2p in 2021.

Annual revenue for 2020 was roughly £109 million, down 3% due to a plunge in citrus prices, though sales actually grew by 4% with orange oil related products stripped out and Treatt delivered a good profit performance overall thanks to growth in the other parts of the business.

SEVERAL SWEET SPOTS

During the pandemic, Treatt has profited from buoyant demand for drinks consumed at home, from rising demand for citrus co-products used in industrial and household cleaning products, as well as from strong growth in its higher margin health and wellness category including sugar reduction.

The portfolio is well-suited for consumer trends towards clean labels and more natural, healthier products. One example is the consumer shift away from beer and towards craft beers, alcoholic seltzers and cocktails, all of which contain natural flavourings.

Treatt is making inroads in the global alcoholic seltzer market, worth $4.4 billion in 2019 according to Grand View Research and expected to grow at a compound annual growth rate (CAGR) of 16.2% from 2020 to 2027.

And while lockdowns have hit drinks demand across the on-trade (bars, restaurants, hotels), eventual re-openings will create a top line tailwind for Treatt, now 75% of the way through a capital investment programme in the US and UK which will underpin future growth.

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