We think the recent share price weakness at PureCircle (PURE), caused by the seizure of a shipment of stevia from China, presents a buying opportunity. While this event does represent a risk, we are encouraged by the company's insistence that the seizure was based on "inaccurate" allegations that the shipments contained products produced using forced labour. What's more, the market for stevia, a natural calorie-free sugar substitute, seems to have reached something of a tipping point, with a number of high-profile brands launching products using the sweetener, such as Coca-Cola Life. This could herald a period of massive growth in the use of the sugar alternative, which PureCircle, as the world's largest producer and marketer of high-quality stevia, looks in a prime position to benefit from.
- Rising use of stevia
- Vertically integrated business
- Improving margins
- Low historical valuation
- US shipping issue
- Concentrated share register
As well as growing the stevia plant, PureCircle also produces its own proprietary ingredients - it has 17 at present - which helps lock in its customers. Market intelligence agency Mintel estimates that there are more than 9,000 products that count stevia as an ingredient and that more than 70 per cent of these were brought to market in the past three years. Indeed, the company's management believes the market for stevia is set to rapidly expand from $200m a year to $1bn.
The growth reflects an increased consumer awareness of the health risks associated with excessive sugar consumption. The move to introduce a tax on high-sugar drinks in the UK in 2018 will also encourage further reformulation of drinks by manufacturers. Stevia has already taken a key role in this process, with brands such as Sprite and Fanta using the sweetener. What's more, recent regulatory approvals in India and Brazil highlight the global potential.
PureCircle has farms in China, Kenya and Paraguay, meaning the entire crop won't be affected by one weather event and management has said it plans to have the majority of supply outside China by 2020. This aim is being met through its leaf development hubs in Africa, South America and India. It is also making progress with larger commercial agricultural partners which, it says, have the potential to scale supply more quickly than traditional smallholders.
Meanwhile, as turnover grows, profitability is expected to continue to race ahead following a first-half gross margin increase of 8 percentage points to 42 per cent - 3 percentage points of this was down to currency movements.
| PURECIRCLE (PURE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 343p | MARKET VALUE: | £590m | |
| TOUCH: | 337-344p | 12-MONTHHIGH: | 448p | LOW: 273p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 22 | |
| NET ASSET VALUE: | 109¢ | NET DEBT: | 25% | |
| Year to 30 Jun | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2013 | 70.00 | -9.0 | -5.8 | nil |
| 2014 | 101.00 | 3.0 | 1.4 | nil |
| 2015 | 127.00 | 1.0 | 2.4 | nil |
| 2016* | 163.00 | 25.0 | 12.2 | nil |
| 2017* | 207.00 | 45.0 | 22.9 | nil |
| % change | +27 | +80 | +88 | - |
Normal market size: 5,000 Matched bargain trading Beta: -0.29 *Mirabaud forecasts, adjusted PTP and EPS figures **£1=$1.45 | ||||
