Treatt Profit Warning

It has been suggested by articles in Investors Chronicle that now might be the time to venture back into the small cap market after a big fall in the share prices of such companies in the last year (the FTSE-AIM index is down by 27%). But investors in Treatt (TET) might not agree. After a profit warning this morning the share price is down by 31% at the time of writing.

Treatt is a supplier of natural flavouring and fragrances and has been highly rated in the last few years because of its apparent strong market position in the sector (a forecast p/e of over 27 before this warning).

What is the reason for the profit warning? Well there are a whole rag-bag of excuses including lack of anticipated performance in Tea blamed on poor US consumer confidence, volatility in FX movements, significant input cost inflation and Covid-19 restrictions in China.

Has poor US consumer confidence really impacted the consumption of that horrible beverage iced tea or was the company just being over-optimistic in sales forecasts? I suspect the latter.

Note I do not currently hold Treatt although I have done in the past. I eventually came to the conclusion that the share was too optimistically priced as I was not convinced it had as strong a market position as suggested and was vulnerable to competition.

Another small-cap company reporting today was Up Global Sourcing (UPGS) which I do hold. They issued a pre-close trading update in which they: “Unaudited Group revenues increased 13% to a record £154.2m (FY21: £136.4m), driven by the earnings enhancing acquisition of Salter, and a resilient performance of the core business, with underlying organic growth of 1.0% to £137.9m (FY21: £136.3m). Growth has been particularly strong with our supermarket customers, which now represent our largest sales channel”.

But with organic growth only 1.0% and a looming recession that will no doubt impact consumer goods purchasing, the share price has only risen slightly today. On a prospective p/e of 9 that is certainly looking cheap in comparison to what it was a year ago but I am not yet convinced it’s time to pile into such small cap stocks. The future needs to be clearer, particularly re supply chain costs ex China and consumer confidence in the UK.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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