Next year should prove a sweet one for Treatt (TET) and its shareholders. The extracts-to-ingredients supplier has the recipe for long-term growth and many of the hallmarks of a high-quality company including an unwavering focus on innovation, strong cash generation and double-digit returns on both equity and capital employed.

Well-placed to profit as its end-markets recover from an unhelpful spell of customer destocking, Treatt offers a long-term play on consumer trends including a preference for natural products and the growing interest in health and wellness.

A progressive dividend payer, Treatt has virtually eliminated its debt and is led by an ambitious new CEO hungry for growth in existing and new markets alike. While a forward PE (price to earnings) ratio of 17.3 might look expensive, this is actually a material discount to Treatt’s 10-year trailing average and that of its peer group.

Shares sees scope for upgrades and a re-rating ahead as the well-invested £297.5 million cap bags new business, delivers growth in overseas geographies and improves gross margins above consensus expectations.

Takeover speculation surrounding peer Tate & Lyle (TATE) has highlighted the attractions of speciality ingredients companies to potential acquirers, so future bid interest cannot be ruled out.

A LEADER IN A NICHE MARKET

Treatt is a niche yet market-leading natural extract and ingredient manufacturer that provides products to the global beverage, flavour, fragrance and consumer goods markets. It is particularly strong in beverages, a defensive sector seeing trends towards natural, clean label and calorie-free products which play to the company’s strengths.

Crucially, the Suffolk-based business has pedigree in passing on cost increases to customers, which will be key in an environment of elevated raw material prices, particularly in citrus, and increasing wage pressures.

With facilities in the UK, US and China, Treatt’s competitive strengths include experience in sourcing and trading raw materials and its long-term and deepening relationships with customers. And the company is poised to accelerate growth in existing and new markets such as China under the stewardship of new CEO David Shannon, who joined from chemicals giant Croda (CRDA) and wants to take Treatt beyond its core markets of the US and Western Europe and into new geographies in Asia and Latin America over the next 12 months.

Under Shannon’s new strategy, Treatt should also expand its gross margins and improve earnings quality through a product shift mix from its lower margin Heritage business, which spans citrus, herbs, spices and florals and synthetic aroma, into the higher margin Premium segment spanning tea, health and wellness and fruit and vegetables.

Shannon is also seeking to broaden the customer base, since customer concentration has long been a concern for investors in Treatt; he will focus on showcasing the firm’s capabilities and securing wins with medium-sized FMCG (fast moving consumer goods) clients where Treatt is currently under-indexed.

Although revenue of £153.1 million for the year to September 2024 missed estimates by a smidge as extreme US weather delayed a large shipment and shifted the associated sales into full year 2025, Treatt’s pre-tax profit came in slightly above guidance at £19.1 million.

ENCOURAGING MOMENTUM INTO 2025

Encouragingly, second-half sales growth of 13% reflected organic growth from new business wins and a normalisation in industry demand, with management calling out ‘favourable’ sales in citrus, which remains a core focus for Treatt, as well as in China, where a large proportion of the new business wins are coming from, all of which augurs well heading into the new calendar year.

The cash-generative company also reported a significant reduction in year-end net debt from £10.4 million to just £700,000, providing Treatt with the firepower to invest in organic growth while rewarding investors with rising distributions.

Investec forecasts a rise in pre-tax profits to £21 million for the current year, ahead of £23 million and £24.7 million in 2026 and 2027 respectively, as sales sweeten up to the thick end of £180 million by 2027.

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