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Forget Britvic! I’d rather buy this overlooked growth stock

Image source: Getty Images.

There’s a growing trend of people becoming more alert to the ingredients they’re consuming. Branded fast-food providers are offering healthier vegan options, and the global consumption of sugar-sweetened beverages is being hit as sugar taxes are introduced to tackle obesity. Companies within the beverages industry in particular — such as Britvic and The Coca-Cola Company — are having to adapt to healthier methods of achieving their signature — like the ones being offered by this growth stock — in order to retain their customers.

The opportunity

Treatt (LSE:TET) is a chemicals company that specialises in the design and manufacture of natural flavours and fragrance solutions for over 900 clients.

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The firm offers a diverse portfolio of products that are widely applied throughout the food & beverage industry as well as cleaning supplies industry.

What’s more, by using all-natural ingredients in its solutions, clients don’t have a long list of chemicals printed all over their products that would deter customers. This competitive advantage has made Treatt very sticky with its clients.

growth stock

Image: Treatt

The growth stock works directly with its clients and suppliers in the development of new flavours and fragrances as well as ensuring that quality isn’t compromised.

As such, the R&D department has seen a continually rising budget, attracting a wide array of talented laboratory researchers who make the design and development of the bespoke solutions possible.

The financials

Despite some initial disruptions from the Covid-19 pandemic, the firm has continued to perform in line with expectations and ahead of 2019 results, with its Health & Wellness products leading the charge with a 16% increase in revenue.

  Citrus Health & Wellness Tea & Coffee Fruits & Vegetables Herbs, Spices & Florals Aroma & HICs
Revenue (£m) 54.5 7.6 6.5 7.6 12 21
1-Year Growth (%) -10 16 -2 10 8 0
Revenue Portion (%) 50 7 6 7 11 19

While Citrus – the most prominent portion of revenue – saw a 10% decline in sales, the overall underlying profit from this segment increased compared with 2019.

In addition the firm experienced rising demand for citrus co-products for industrial and household cleaning products across the globe. Therefore I think that the decline is likely linked to minor disruptions to operations in the early stages of the pandemic.

All other segments bar Tea & Coffee – which saw a 45% increase in revenue in the first half of 2020 – have seen growth in line with expectations.

The risk factor

The firm’s reliance on natural ingredients for its products has given it a valuable competitive advantage over rivals. But it has also exposed it to fluctuating crop commodity prices – especially the price of orange oil.

A sudden price increase in these commodities would have an adverse impact on the level of profitability of the business. However the growth stock has strong pricing power with its clients. It would likely be able to pass costs on to them for a short period of time. Of course, the opposite could occur. The price of orange oil has declined from $13/kg to nearly $4/kg since 2017, leading to an increase in profit margins.

Along with global food & beverage trends shifting towards a healthier lifestyle, the desire for exotic flavours and fragrances has grown. I believe Treatt’s design and manufacturing infrastructure around the world places it in the perfect position to continue creating a series of bespoke products for its ever-expanding roster of clients.

A Top Share with Enormous Growth Potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Share… free of charge!

Zaven Boyrazian does not own shares in Treatt. The Motley Fool UK has recommended Treatt. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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