As the world grows richer, so it grows fatter, more diabetic and, paradoxically, more health-conscious. This trend is playing into the hands of PureCircle (PURE), one of the world's biggest producers of natural, low-calorie sweeteners derived from the stevia plant and provides the presently loss-making company with blue-sky growth potential. Stevia is a relatively new ingredient in the global food market, but having now gained regulatory approval in several countries, it's being adopted by a rising number of food and beverage makers as an alternative to sugar, in response to consumer demand for healthier foods. PureCircle's sales are already soaring, but with the global market for stevia expected to swell further, growth is expected to pick up. And, with major beverage manufacturers such as Coca-Cola gearing up to restock their depleted stevia inventories, now could be just the time to tuck into the shares.
- Stevia becoming more mainstream
- High barriers to entry
- Regulatory approval gathering pace
- Growing demand for natural sweeteners
- Strong forecast sales growth
- Still loss-making
- Inventory build-up risk
With a turnover last year of $71m, PureCircle is the world's largest producer of high grade stevia extract in a global market estimated to be worth roughly $300m. This dominant position is unlikely to be toppled, as its biggest rival, Canadian GLG Life Tech, is still recovering from financial problems. And because barriers to entry are high, a great deal of expertise and investment is needed in cultivating the plants, extracting the sweet compounds and producing specialised blends to suit individual clients. Here, PureCircle has invested a lot of time and money, which is paying off - last year new products sales more than doubled to represent half the total.
| PURECIRCLE (PURE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 461p | MARKET VALUE: | £759m | |
| TOUCH: | 458-465p | 12-MONTH HIGH: | 467p | LOW: 232p |
| DIVIDEND YIELD: | nil | PE RATIO: | 73 | |
| NET ASSET VALUE: | 86¢* | NET DEBT: | 54% | |
| Year to 30 Jun | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2011 | 53.3 | -19.5 | -11.9 | nil |
| 2012 | 45.4 | -26.7 | -15.1 | nil |
| 2013 | 71.2 | -9.48 | -5.80 | nil |
| 2014** | 97.0 | -2.22 | -0.40 | nil |
| 2015** | 144 | 16.1 | 10.3 | nil |
| % change | +48 | - | - | |
Normal market size: 7,500 Market makers: 8 Beta: 0.43 *Includes intangible assets of $32.5m, or 20¢ a share **Liberum Capital forecasts £1=$1.63 | ||||
Customer numbers are rising, too, having jumped by over 200 to more than 300, and PureCircle has signed a five-year supply contract and a joint development agreement with Coca-Cola. Several stevia-sweetened sodas such as Coca-Cola Life are already being sold around the world and more brands are gearing up for launch. And, while stevia has gained regulatory approval in many countries, several key markets such as India and Indonesia remain untapped, but are expected to give approval next year.
This is good news for PureCircle because the business needs scale to turn a profit. With sales rising sharply, margins are ballooning and post-tax-profits are within sight. Indeed, between 2012 and 2013, revenue jumped 57 per cent to £71m, but the gross margin more than doubled to 26 per cent, while cash profits grew to £4.9m from a £15.2m loss the year before. Analysts expect pre-tax profit will be attained in 2015, but it is the growth potential from there that represents the truly exciting opportunity. Broker Liberum Capital believes a 3.4-fold increase in sales could be on the cards between 2013 and 2016. Growth potential like this makes something of a nonsense of valuing the group off near-term earnings forecasts, although, these are admittedly eye-wateringly high. There is a risk that sales could slump just as PureCircle has beefed up production, but given the global momentum behind stevia, this seems unlikely.
