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Is Treatt plc the market’s best hidden gem after soaring 20%?

Shares in Treatt (LSE: TET) jumped by as much as 22% in early deals this morning after it issued a remarkably upbeat trading update. 

Specifically the company, which produces cosmetic ingredients and fragrances for many different consumer goods, told investors that it expects full-year profit before tax to “substantially exceed previous expectations.” 

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Treatt seems to be firing on all cylinders. Only last month the company reported that the start of its year had been “encouraging” with new business wins turning into orders. It seems this momentum has continued and now, for the six months to 31 March 2017, Treatt is forecasting year-on-year revenue growth of more than 20%. Furthermore, management expects group margins to improve against the year-ago period. 

For the year ending 30 September, 2017 City analysts are expecting Treatt to report earnings per share of 14.1p, up 10% year-on-year thanks to revenue growth of 4%. It now looks as if these forecasts will be revised substantially higher following today’s positive update from the company. 

Bright outlook

Over the past few years, Treatt has racked up slow but steady growth. Earnings per share have roughly doubled, rising from 6.9p for the year ending 30 September 2012 to an estimated 14.1p for the year ending 30 September 2017 (as noted above this figure is likely to be revised higher over the next few weeks). This steady growth has helped push the company’s shares higher. Over the past three years, shares in Treatt have risen 104% excluding dividends. 

Based on today’s trading statement, it looks as if the growth is going to continue for some time to come. The company has set out a plan to boost revenues, margins and profits steadily through 2020. Most of this is expected to come via organic expansion, but the business also has plenty of firepower for bolt-on acquisitions to boost growth. Net debt is projected to increase to as much as £12m by the end of the first half of fiscal 2017, but with free cash flow generation coming in at £8m last year, Treatt should be able to reduce its debt pile over the next few years quickly. 

What’s more, last year it reported a return on invested capital of 24.6%, which is nothing short of outstanding. ROIC measures how much profit a business is producing for every £1 invested. Most companies struggle to achieve an ROIC greater than 10%, so a ratio over 24.6% is extremely rare. 

Worth paying for 

Thanks to its impressive growth over the past five years and the improving outlook, shares in the enterprise are not cheap. Based on current City estimates, Treatt is trading at a forward P/E of 22.3. However, as noted above, City figures may be revised higher over the next few months, so this valuation may not be entirely trustworthy. 

Still, based on Treatt’s impressive growth and high ROIC, it could be worth paying a premium multiple to buy shares in this premium company. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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