PureCircle — Finding the sweet spot?

PureCircle — Finding the sweet spot?

Despite significant headwinds coming from the US Customs and Border Protection (CBP) blocking its products throughout the half year, PureCircle has weathered the storm well. H117 sales outside the US were up 10%, with total sales down 13.4% despite the company being denied access to a market that previously represented one-third of its revenues, and gross margins holding up remarkably well considering there were adverse mix effects. The innovation pipeline is strong and the scope for stevia use in the food and beverage industry continues to increase.

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Written by

PureCircle

Finding the sweet spot?

Consumer

QuickView

13 March 2017

Price

315p

Market cap

£547m

Share price graph

Share details

Code

PURE

Listing

LSE

Shares in issue

173.7m

Business description

PureCircle is the world’s largest producer and marketer of high-purity stevia, the plant-based sugar substitute. It is a vertically integrated manufacturer and its business spans plant breeding and harvesting through extraction and application of stevia leaf extract.

Bull

Stevia remains an attractive sugar substitute.

Pipeline is strong.

New refinery will drive efficiency/lower costs and help to meet anticipated future volume demand.

Bear

Recovery from CBP problems will take some time.

Competition likely to increase with fermentation-based stevia alternatives scheduled for launch in 2018.

Net debt of $80.1m at H117 vs adjusted EBITDA of $37.7m for FY16 is comfortable.

Analysts

Sara Welford

+44 (0) 20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Despite significant headwinds coming from the US Customs and Border Protection (CBP) blocking its products throughout the half year, PureCircle has weathered the storm well. H117 sales outside the US were up 10%, with total sales down 13.4% despite the company being denied access to a market that previously represented one-third of its revenues, and gross margins holding up remarkably well considering there were adverse mix effects. The innovation pipeline is strong and the scope for stevia use in the food and beverage industry continues to increase.

Weathering the storm

PureCircle continues to successfully lead industry innovation and unlock the market and this has been particularly apparent in H117 while the US market was closed to the company. Over time, management has diversified the revenue streams away from basic ingredients and further towards value-added ingredient solutions. In addition, the business is well-balanced by geography, although the US will continue to be the largest market by the nature of the size of its food and beverage industry.

Expanding the business

The $42m refinery capacity expansion in Kuala Lumpur was completed on schedule and within budget. This should allow the company to meet future increased demand, and the new technology at the plant will allow increased efficiency and lower manufacturing costs. Stevia remains an attractive sugar substitute due to being a highly efficient source of sweetness and zero calories. PureCircle's stevia product is also 100% natural. While the business is still at a relatively young stage, we expect inventories to remain at high levels to ensure the security of supply for existing applications and to allow customers to reformulate and launch new products without having to worry about supply constraints or bottlenecks.

Valuation: Potential growth not priced in

Trading at consensus FY18e P/E of 36x, PureCircle continues to be valued at a premium to the global ingredients peer group given its strong growth prospects. It is on a strong growth trajectory as stevia gains traction as a sugar substitute and its use in the food and beverage industry becomes more widespread. Volatility is likely to remain a feature while the business grows and its products become more established. Over the next 12 months, we also expect the company to benefit from a recovery in the US now that the US CBP issue has been resolved.

Consensus estimates

Year
end

Revenue
($m)

PBT
($m)

EPS
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/16

138.6

16.1

8.7

0.0

44.1

N/A

06/17e

141.0

12.9

6.4

0.0

60.0

N/A

06/18e

171.7

22.0

10.8

N/A

35.6

N/A

06/19e

200.3

31.5

15.7

N/A

24.5

N/A

Source: Bloomberg

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney NSW 2000

Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney NSW 2000

Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2017]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney NSW 2000

Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney NSW 2000

Australia

32Red — Kindred spirits

Kindred Group’s all cash offer for 32Red marks a meaningful and well-priced entry into the UK online casino market. With robust FY results and 20% growth in Q117 net gaming revenues, our standalone 32Red forecasts are largely unchanged, underpinned by continued margin expansion and high cash generation. Within an enlarged group, there should be additional revenue and cost synergies, suggesting upside to our numbers. Consideration is expected to be paid in mid/late May.

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