Flavour firm Treatt is still tasty tip

FOR years, food flavourings business Treatt lived up to its name. Sales were growing, profits were rising and the shares soared. Midas recommended Treatt in 2014, at £1.59. The price had rocketed to more than £12 by last Christmas. Now, after serving up a hefty profits warning last week, Treatt shares have fallen to £5.69.

Chief executive Daemmon Reeve, more used to dishing out good news, was forced to admit that profit for the year to September 30 is likely to be little more than £15million, well below City forecasts and his own expectations too. Last year, Treatt profits were £21million. They had risen 40 per cent compared to 2020 and the company seemed to be on a roll.

But the group has been stymied on several fronts. Iced tea was one of Reeve’s big winners last year, including flavoured alcoholic teas, which seemed to be a new craze among American consumers. Now they have lost interest and Treatt is no longer top dog at the US tea party. Currency movements have hit the group as well. Hedging contracts were taken out to manage risk but they failed to buttress Treatt against the dollar’s surge in value and sterling’s corresponding fall.

Higher raw material costs have added to the misery, while a relatively new subsidiary in China was affected by protracted lockdowns and other Covid-19 restrictions in the People’s Republic.

For shareholders, this tale of woe is clearly unwelcome and a larger business may have been able to manage the headwinds better. However, Treatt’s strategy should generate returns over the longer term.

Treatt specialises in natural flavourings – cucumber essence made from real cucumber, watermelon extract made from Florida-grown watermelons, lemon fragrance made from Mediterranean lemons, honey harvested from Texas beehives and a host of herbs and spices too. Tea may be out of favour but coffee is all the rage, with the group making extracts used in ready-mix cans, espresso martinis and other trendy thirst-quenchers.

These ingredients are sold to some of the biggest food and drinks manufacturers in the world and used principally in flavoured drinks. Treatt competes against huge international corporations but Reeve wins out because customers and end-consumers are increasingly drawn to natural ingredients. They like the way Treatt works and, crucially, the way its products taste. To that end, the group’s order book is 25 per cent ahead year on year and sales for 2022 are still expected to be higher than in 2021, even if profits will be well down.

Brokers believe the dividend will rise too, from 7.5p last year to 8p this and 8.5p in 2023, with sales and profits increasing steadily after this year’s bump in the road. Reassuringly too, Reeve bought shares immediately after the profits warning, as did chairman elect Vijay Thakrar and current chairman Tim Jones, who retires in January.