MIDAS SHARING TIP UPDATE: Flavor company Treatt is still a tasty tip, despite big profit warning
Tasty: Treatt should find its marks
For years, food flavoring company Treatt lived up to its name. Sales were up, profits were up, and stocks were skyrocketing. Midas recommended Treatt in 2014, at £1.59. The price had soared to over £12 last Christmas. Now, after issuing a big profit warning last week, shares in Treatt have fallen to £5.69.
Chief executive Daemmon Reeve, more accustomed to spreading good news, was forced to admit that profit for the year to September 30 is expected to be just over £15million, well below forecasts of the city and of its own expectations as well. Last year Treatt’s profits were £21m. They had increased by 40% compared to 2020 and the company seemed to be on the right track.
But the group was blocked on several fronts. Iced tea was one of Reeve’s big winners last year, including flavored alcoholic teas, which seemed to be a new craze among American consumers. Now they’ve lost interest and Treatt is no longer America’s top tea party dog.
Currency movements also affected the group. Hedging contracts were entered into to manage the risk, but they failed to protect Treatt against the rise in value of the dollar and the corresponding fall in the pound sterling.
Rising raw material costs added to the misery, while a relatively new subsidiary in China was hit by extended shutdowns and other Covid-19 restrictions in the People’s Republic.
For shareholders, this tale of doom is clearly unwelcome, and a larger company might have been able to handle the headwinds better. However, Treatt’s strategy should generate longer-term returns.
Treatt specializes in natural flavors – cucumber essence made from real cucumber, watermelon extract made from Florida-grown watermelons, lemon scent made from Mediterranean lemons, honey harvested from Texas beehives and a multitude of herbs and spices. Tea may be out of fashion, but coffee is all the rage, with the group making extracts used in ready-made cans, espresso martinis and other trendy thirst-quenchers.
These ingredients are sold to some of the largest food and beverage manufacturers in the world and used primarily in flavored beverages. Treatt competes with huge international corporations, but Reeve prevails as customers and end consumers are increasingly drawn to natural ingredients. They love how Treatt works and, above all, the taste of its products. To that end, the group’s order book is ahead by 25% year-on-year and sales for 2022 should still be higher than those of 2021, even if profits will be well down.
Brokers believe the dividend will also rise, from 7.5p last year to 8p this year and 8.5p in 2023, with sales and profits rising steadily after this year’s bump. Also reassuringly, Reeve bought shares immediately after the profit warning, as did chairman-elect Vijay Thakrar and current chairman Tim Jones, who is retiring in January.
Midas verdict: Treatt shareholders who bought in 2014 are still in the money, but they’ve gotten quite a bruise this year and deserve to feel aggrieved. However, now is not the time to sell. Treatt should find its feet again next year and valuable lessons have been learned from the recent maelstrom. Brave investors may even want to follow the administrators’ lead and dip a toe in the waters of the £5.69 Treatt.
Traded on: OBJECTIVE Teleprinter: TFW Contact: Treatt.com or 01284 702 500