These were a decent set of results and were followed up with an impressive Investors presentation where they set out some key targets for the future. In particular ROCE which has fallen as low as 16.7% (in large part due to the investment in new facilities) is targeted for 20-25% and net operating margin which is 13.8% is targeted for 15%.
The Company had a good first halt to March 2020 with a solid second half significantly affected by Coronavirus.
Revenue was down 3% but Operating Margin was up 11% reflecting both an ongoing change in the product mix towards higher margin product and a rise in Orange oil prices. Whilst the rise had been expected by management and previously forecast the orange oil is a world commodity so the rise in margin was not down to Treatt. The company also reached 50% for non-Citrus products. As moving away (mainly by growing non citrus) is a long term aim this small increase in non citrus (46% to 50%) was welcome and an indication of the team delivering on the strategy.
Profit before tax was up 9.5%, which given there has been clear investment in higher quality (higher cost) staff was positive. The ongoing development of the UK site continues and the company as previously announced broadly gave their Kenyan operation to local management which stems the ongoing losses.
The company announced the intention to operate a Chinese office in the next 12 months. China remains an under penetrated market at the moment.
The group has gone from being cash positive to cash neutral and will be going cash negative. This is largely due to the ongoing capital investment in the new US and UK facilities. Trading is cash positive.
At the end of the day Treatt is a good company with what I consider to be very good management. They say what they are going to do, they do it then they tell you they have done it and what they are going to do next. It sits in a growth market that it is performing well in. That being said there are both strengths and weaknesses. The company listed its top 10 customers and 7 of them were top 10 in 2015 and only 1 was outside the top 20 in 2015. This shows great customer retention and longevity, but does make me wonder whether it can really grow at faster than market rates by acquiring new companies that can really drive the business forward or is customer stickiness just as valid for competitors.
I have recently sold some as it reached my valuation. These results have led me to increase my valuation but not by much. The company is highly valued and very much relies on growing into its valuation. This is certainly not a deep value investment and only just about sits at GARP. At its valuation I would consider selling it should funds need to be made available. Whilst these results were clearly Coronavirus hit even with better results this would still need to be a solid to strong growth story to deliver on the valuation.
Dividend is up 9% but not payable till March. Long delayed dividends are a bit of your cheque is in the post type of deal to my mind. Yes it provides cash management but it’s the owners money and not paying it for 5 months always seems slightly dodgy to me.
I am happy to hold what I still have (circa 4% of my portfolio) but at this valuation I am not adding.