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PureCircle looks to slim down and grow

The company's Starleaf stevia product tastes more like sugar than other products on the market
November 1, 2018

Around the world, consumers are becoming more health-conscious at the same time as the global obesity and diabetes epidemic is causing governments to increase regulatory pressure on the producers of sugary foods and drinks. These trends play into the hands of PureCircle (PURE). The company produces an all-natural, zero-calorie sweetener from the stevia plant. This herbal sweetener is considered to be healthier than artificial sweeteners and many international food and beverage giants have launched products using the ingredient.

IC TIP: Buy at 340p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points

Huge potential growth

Breakthrough Starleaf product

Sharp rise in free cash flow expected

Refinanced debt

Bear points

Extremely high inventory and receivables 

High debt level

In the past, the uptake of stevia has been held back by its licorice-like, bitter aftertaste. However, PureCircle believes its new Starleaf stevia represents a taste breakthrough. For shareholders, the excitement is not only based on the potential for Starleaf to unlock growth, but also to free up cash from the group's bloated balance sheet.

At the end of June the company recorded inventory of $123m, which represented a gargantuan 150 per cent of its cost of sales, equivalent to inventory days of 548. Such high levels of stock do represent the risk of write downs, especially when they need managing in conjunction with the introduction of a new product. Meanwhile, receivables – payments yet to be received – stood at $57m, or 44 per cent of turnover, equivalent to debtor days of 160. These numbers may understandably cause many investors to turn tail and run and contribute to why we regard this tip as highly speculative.

However, Starleaf's quicker refining process, coupled with PureCircle's efforts to diversify its leaf supply away from China, should see inventories start to fall fast in coming years. What's more, based on broker Numis's forecasts for receivable, payment terms are expected to improve as PureCircle deepens its relationships with its nine key customers – Coca-Cola, PepsiCo, Danone, Nestlé, Unilever, Firmenich, Merisant, IFF and Kraft Heinz – which make up three-quarters of sales.

There is certainly a lot of fat to cut from the group's working capital, which underpins forecasts from Numis that free cash generation will go from an $8.7m outflow in 2018 to a $27.5m inflow next year, rising to $39.8m by 2021. In the meantime, the funding for future projects should be made easier after the company recently refinanced its debt at lower interest rates and with more flexible terms.

Numis also expects “game changer” Starleaf to help PureCircle generate a 45 per cent compound annual earnings growth rate over the next three years, taking earnings per share (EPS) from 5.5¢ to 16.8¢. Patents should help protect PureCircle's Starleaf advantage with 117 stevia-related patents in place, and 295 pending.

The end market certainly looks promising, with high-intensity sweeteners (HIS) currently worth around $2bn a year – and with natural varieties like stevia accounting for around $700m of this. The appeal of stevia is one of the driving factors behind the forecast growth rate for natural HIS products of 7.8 per cent over the next five years – twice the rate of artificial HIS varieties. 

PURECIRCLE (PURE)   
ORD PRICE:340pMARKET VALUE:£592m
TOUCH:335-340p12-MONTH HIGH:517pLOW: 276p
FW DIVIDEND YIELD:NILFW PE RATIO:35
NET ASSET VALUE:130¢*NET DEBT:43%
Year to 30 JunRevenue ($m)Pre-tax profit ($m)**Earnings per share (¢)**Dividend per share (¢)
201613917.98.5nil
201711912.97.2nil
20181318.35.5nil
2019**15613.66.7nil
2020**18725.312.5nil
% change+20+86+87-
Normal market size:2,000   
Matched bargain trading    
Beta:1.09   
*Includes intangible assets of $64.1m, or 37¢ a share £1=$1.28
**Numis forecasts, adjusted PTP and EPS figures