Treatt’s turnaround may have begun

Natural extracts and ingredients manufacturer Treatt (TET) appears to be in the early stages of a revival after what has been a difficult year for its shares. Revenue for the 12 months to the end of September was up – although this was largely thanks to price increases. 

Destocking also increased in the second half as customers looked to slim down their inventories as interest rates crept up. Management said it dealt with the trend “proactively” via cost discipline and pricing action.

Falling pre-tax profits might have given some investors cause for concern, but any worries should be offset by the group’s strong cash generation. Net debt reduced from £22.4mn to £10.4mn over the course of the financial year, while the gross margin improved by 250 basis points to 30.4 per cent. 

However, Treatt’s net operating margin – a measure of the portion of revenue a group keeps as profit – decreased from 11.9 per cent to 9.9 per cent in FY2023. The figure had been artificially inflated by a one-off exceptional gain realised when the company sold its UK site in the prior year. 

There’s no doubt that trading conditions remain challenging for the group, which saw crucial value-added beverage volumes fall moderately. Meanwhile, commodity volumes declined even more significantly after the company conducted a “strategic shedding” of select lower-margin citrus products. 

Destocking of synthetic aromas in Europe and the UK meant that revenue in these regions shrunk. Sales in the US, on the other hand, were up 14 per cent to £61.4mn on strong demand for citrus products. Treatt is also hoping to continue expanding its presence in China, where turnover was up 21 per cent to £9.5mn.  

Management has also identified coffee products as another strategic growth driver. Sales reached £5mn in FY2023, up from just £1mn in the prior year, as Treatt narrowed its focus on the premium cold brew and ready-to-drink markets. 

But the key factor that will determine the group’s trajectory is destocking. “We are now seeing some early signs of a reversal of this temporary growth slowdown in a few customers,” said outgoing chief executive Daemmon Reeve in a statement. He went on to note that volumes remain down from normalised levels. 

The shares are currently trading on almost 19 times projected forward earnings for FY2024, which we think looks steep in light of continued uncertainty in the business. We remain at hold. 

Last IC view:  Hold, 665p, 9 May 2023