Treatt grows profits against the odds

After a subdued start to the current financial year, flavour and fragrance specialist Treatt (TET) is on the up. Customer de-stocking and declining sales volumes defined the first quarter, but order patterns normalised in the three months to the end of March. Cost discipline meant that pre-tax profits ticked upwards in the first half, even as revenue dipped overall.

With around 50 per cent of group sales, citrus remains Treatt’s single-largest category. However, turnover here declined by 7.2 per cent as prices remained stubbornly high, particularly in orange oil. Meanwhile, the group’s 'premium' categories – a cohort that includes tea and health & wellness – saw sales growth of 6.5 per cent in the first half. 

Management said it continues to expect strong performance from the division, which often sees its strongest performance in the second half. “The company has a solid order book  [...] and is seeing a material step-up in pipeline opportunities,” said analysts with broker Peel Hunt. “The latter reflects a return to more normal product innovation (post the inflation spike) and the improved reputation of Treatt.” 

The group’s operating profit margin improved by 120 basis points on the same period last year, which management said reflects cost discipline and its self-help measures. Net debt was roughly flat at just over £10mn, although this figure is likely to shrink later in the year as receivables convert to cash on the balance sheet.

According to Peel Hunt, Treatt’s closest competitors currently trade on around 19 times consensus forward earnings and the sector leaders at 36 times. This makes the group’s own 20.5 multiple look like a good deal given its growth characteristics. We’d argue that its recent track record of growing profits and managing spending against tough market conditions make this a price worth paying. Buy.

Last IC view: Buy, 371p, 21 Mar 2024