I believe I have found another company displaying such positive characteristics, Treatt (TET: 440p), a world-leading manufacturer and supplier of flavour, fragrance and cosmetic ingredients. It is also a business that has been around for over 125 years. Treat is based in Bury St Edmunds, Suffolk, but its diverse product portfolio is manufactured not just in the UK, but also in the US and Kenya. The company generates sales of around £74m a year selling products to corporations in no fewer than 90 countries and has main sales offices in North America, Asia and Europe.
The ingredients that Treatt manufactures are historically based on essential oils, which are distilled or blended, and the Treattarome range of natural distillates. Treatt also distributes a range of aroma chemicals to the flavour and fragrance industries. Typical products using a Treatt ingredient range from soft drinks, alcoholic beverages, shampoos and soaps to confectionery and basic pharmaceutical products. Treatt is a world leader in the supply of essential oils and natural distillates for these uses.
Through its cosmetics division, Earthoil, Treatt offers naturally-derived cosmetic ingredients, specialising in organic and fair trade, reflecting a commitment to ethical and sustainable practices. End customers include cosmetics manufacturers and fragrance companies. Earthoil's operations include a processing base in Kenya and fair trade grower projects in Eastern Africa. Sales of an Earthoil branded range "continue to grow at a steady pace", according to Treatt's chairman, Tim Jones.
New business wins and margin improvement
However, the key point for me in the company's interim results for the six months to end-March 2013, which were released today, was the fact that the company has been "winning new business with large multinational consumer goods groups across a wide range of new and existing ingredients". Sales of tea and citrus ingredients have been performing well and the product mix is now increasingly targeted towards added-value manufactured ingredients, which have been the focus of research and development spend. There has been a particular emphasis on the beverage market.
As a result, gross margins improved from 20 per cent to 22.65 per cent in the latest six-month trading period and with the benefit of tight cost control - overheads fell 9 per cent to £5m - operating profits before currency movements soared 55 per cent from £1.65m to £2.55m.
True, revenues fell from £36m to £33.6m, reflecting lower commodity prices, but, importantly, with an increasing amount of sales being made to multinational companies, the momentum from the first half has fed through in the third quarter. Moreover, further cost savings are expected to come through in the second half.
Analyst upgrades
Ordinarily, this upbeat statement would have led to analyst upgrades for the full year to end-September 2013. However, Nicola Mallard at Investec Securities is being cautious and is maintaining her pre-tax estimate at £5m for the 12-month period, to produce EPS of 34.7p, even though first-half pre-tax profits jumped 29 per cent to £2m and EPS soared 40 per cent to 14.1p. From my lens, the risk to forecasts looks to the upside. Still, even on this conservative basis, the shares are only priced on 12.6 times earnings estimates and, with the interim dividend raised 8 per cent to 5.5p, the rolling 12-month yield is 3.6 per cent. The dividend is paid in October and the ex-dividend date is 11 September.
Investec did, though, raise its forecasts for both the 2013-14 and 2014-15 financial years by 8 per cent and 13 per cent, respectively. The new estimates are for pre-tax profits to rise to £5.6m in the 12 months to September 2014, to produce EPS of 38.7p. For the following year, profits are forecast to rise again to £6.1m, to produce EPS of 42.9p. The dividend forecasts are 16.4p a share for the current financial year, 17.2p for 2013-14 and 18.2p in 2014-15. On this basis, the forward dividend yields are 3.7 per cent, 3.9 per cent and 4.1 per cent. Moreover, the prospective PE ratio drops to only 11.2 in 2013-14 and a miserly 10 in 2014-15. That's hardly an exacting valuation for a company that is starting to boost margins by focusing sales on value-added lines and is clearly winning new business by doing so.
Treatt also has a lowly geared balance sheet - net debt of £17m only equates to 62 per cent of shareholders' funds of £26.1m - and has a conservative accounting policy with £12m of property and plant in the accounts at cost.
Share price breakout looms
Interestingly, Treatt's share price is at an interesting juncture, too. In fact, having hit a high of 440p in mid-February, and again in mid-March, the price is now on the verge of signalling a major triple-top breakout on the point-and-figure chart, as well as a swing buy signal.
With full-year earnings forecasts looking conservative, the share price momentum looks well underpinned given the potential for further good news on sales later this year. The next trading update is in mid-August. In my view, on a bid-offer spread of 430p to 440p, the shares are a strong trading buy and my conservative three-month target price is 500p.
MORE FROM SIMON THOMPSON ONLINE...
I have written five other articles in the past week, all of which are on my homepage and include the following companies or sector trades:
KBC Advanced Technologies ('Fuelled for growth', 6 May 2013)
Communisis ('Buy the triple top breakout', 7 May 2013)
Global Energy Development ('A share priced for a sharp re-rating', 8 May 2013)
Spark Ventures, Greenko ('Awaiting another spark for a re-rating', 9 May 2013)
Thorntons ('A sweet investment', 13 May 2013)
