Treatt benefits from higher-margin citrus sales

As with so many other companies, Treatt’s (TET) performance over the past 15 months has depended on its ability to claw back rising input costs from its customer base. Its latest half-year figures suggest that it has been reasonably successful on that score.

The company, a producer of natural extracts and ingredients for the beverage and fragrance industries, recorded a 70 basis point increase in its gross margin to 28.2 per cent. Reported profits were down on the prior half year, although last year’s figures benefited to the tune of £2.72bn in exceptional items due to the disposal of its premises in Bury St Edmunds, whereas the company was lumbered with net expenses amounting to £542mn this time around.

By the onset of the pandemic, the company had already decoupled its financial performance from shifts in key citrus prices as it sought to reduce its exposure to the vagaries of commodity pricing. And it was the intensified focus on its value-added citrus products, along with nimble cost pass-through measures, which enabled Treatt to drive adjusted profitability in the six months to 31 March this year. Revenue at the citrus business was up by a third, which meant that its share of the overall top line increased by 7.4 percentage points to 54.2 per cent. Sales to beverage customers increased through the period, suggesting that demand could be price-inelastic to an extent in this corner of the consumer goods market.

Just under a year ago, the trading outlook had soured due to lower-than-expected demand for tea in the US, together with the severe Covid-related restrictions in place in China. Although sales in the tea category were down on a proportional basis, management expects that volumes will improve over the second half, while the reopening of China’s economy has seen sales into the region increase by 38.6 per cent.

Further growth is in the offing through the coffee segment. Demand for the company’s natural coffee extracts only generated 2.6 per cent of overall sales, but the proportion is growing steadily. Management said that “although it remains early days, coffee sales growth is promising and provides optimism for the breadth of opportunities”.

Treatt entered the second half with a strengthening order book and sales pipeline, but raw material inflation shows few signs of abating. There must be a limit to the extent to which costs can be passed on before consumer demand falters. So, although long-term prospects remain encouraging, caution is warranted until input costs moderate. We reiterate our previous advice with the shares trading in line with their historical average at 30 times consensus earnings. Hold.

Last IC View: Hold, 654p, 29 Nov 2022