Shares in Treatt have lost a third of their value today after the ingredients business warned its profits would be much lower than expected as a result of sluggish consumer confidence in the US and soaring cost inflation.
The group, which makes flavourings and fragrances for the drinks industry, revised profit expectations for the year down to between £15m and £15.3m. It compared with a figure of £20.9m last year and analyst consensus of £21.7m.
Treatt blamed lower-than-expected tea sales as consumer confidence in the US deteriorated, causing lower demand for the high-margin category of iced and hard tea.
The group also experienced “significant” input cost inflation, but wasn’t able to pass all of it on to customers on longer-term contracts.
Investment bank Peel Hunt put the increase in raw materials at about 20% and another 10% increase in admin costs due to higher labour and other rises. However, it added more costs would be passes on as contracts with customers were renewed.
Currency volatility also hurt the bottom line following the rapid devaluation of sterling against the US dollar, while the Chinese subsidiary was also hit by ongoing Covid restrictions.
Shares crashed 33.1% to 537p on the back of the profits warning. The stock had been one of the big winners throughout the pandemic, surging more than 280% from March 2020 to heights of 1,285p by the end of 2021. It has now lost more than half its value so far this year.
Peel Hunt head of research Charles Hall said the update was “clearly very disappointing” given the strength of the order book and expectations for a stronger second half.
But, he added, most of the isues “should prove temporary” and not materially change the longer-term outlook.
“Clearly this is disappointing short term, but there continues to be plenty of potential, particularly with the benefits of the new facility at Bury St Edmunds,” Hall said.
Peel Hunt reduced its target price for the stock to 800p to reflect the lower expectations.
Treatt said despite the issues it was “encouraged” by other trends seen through the second half of its financial year and still expected revenue growth to be good thanks to a “very strong” order book.
CEO Daemmon Reeve added: “Whilst clearly disappointed by the short-term impact on profitability, we remain encouraged by the underlying trading performance of the business and are confident in the long-term growth drivers for Treatt.
“We have significant opportunities across our categories and geographies and, notwithstanding the short-term impacts in tea, we see strong momentum in all of our categories given the alignment with prevailing consumer trends.
“We also remain excited about the potential in coffee over the next few years and expect this category to be reported separately at the full year given we are now seeing growth in orders and multiple opportunities for the future.”
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