- Tea sales struggle
- Analysts cut target price
Treatt (TET) cut its profit expectations for the year to 30 September to a range of £15mn to £15.3mn, down from the £21.7mn flagged in May’s half-year report. The market responded by marking down the shares by almost a third in morning trading.
Lower-than-expected demand for tea in the US (against a tough comparative), an FX hit to margins due to the weakening of the pound against the dollar (around half of UK sales are made in dollars), “significant input cost inflation” which couldn’t all be passed onto customers, and Covid-19 restrictions in the Chinese market all had their impact on Treatt, which manufactures and supplies natural extracts and ingredients for the beverage, flavour, and fragrance industries. But the company said that the order book is up by around a quarter on last year, and that “we are seeing strong growth” in every category apart from tea.
Peel Hunt analysts said of the headwinds hitting the company that “much of this should prove temporary, so this should not materially change the longer-term outlook”. The house broker, however, slashed its target price to 800p (down from 1,400p).
But the company still expects to see “strong revenue growth” for the year, and tea sales should come in at around 60 per cent higher on a two-year basis despite the difficulties flagged in the update. Treatt is looking at how to limit its exposure to FX volatility, and is not forecasting an above-inflation jump in admin costs. While the profit warning is clearly disappointing, we think the long-term argument for the company remains sound and stick with our buy recommendation for now. At least, that is, until the next trading update in October which will let us know more on just how short-term the challenges facing the business are - buy at 556p.
