When the pandemic hit, nobody quite knew what the impact would be on sustainability. There was some concern that companies would abandon their environmental principles to pursue growth at any cost once lockdowns were lifted.
In fact, it appears to have driven a renewed interest in sustainability. Faced with an existential threat, business leaders started talking even more about so-called stakeholder capitalism (which involves taking into account the needs of society as a whole, as well as those of customers and investors) and rebuilding a better world after the pandemic.
Shoppers, too, have been jolted into making more sustainable and healthier choices. Accenture found that 60 per cent of more than 8,500 people it surveyed around the world had been making more environmentally friendly, sustainable or ethical purchases since the start of the pandemic. Nine out of ten of those shoppers said that they were likely to continue to do so.
The coronavirus outbreak turbo-charged the trend towards healthy eating. The same Accenture report suggested that this would last beyond the pandemic, with 59 per cent of people surveyed saying that they would continue to shop more health-consciously.
These trends will be further propelled by regulation, with a growing number of countries introducing sugar taxes and some contemplating taxes on red meat. The world’s biggest food and drink companies have taken note and are busy developing more meat-free options, as well as products containing less sugar and more natural flavours.
Treatt
That global health kick has driven spectacular growth at Treatt, the Suffolk-based ingredients company, which said that sales of the products that it files under “healthier living” jumped by 57 per cent in the six months to March, compared with the same period the previous year.
Treatt sells flavours and fragrances to some of the biggest drinks companies in the world. These flavours generally are created from the natural products that they are intended to taste like. That’s important for food and drinks companies, which have responded to demand for “clean label” products, which are made from as few ingredients as possible, with those ingredients being regarded by consumers as healthy.
Treatt’s products can be found in everything from flavoured waters to cold coffee to meat-free burgers. As a company, it works with manufacturers to improve flavour, as increasingly they are forced to cut the sugar content of their drinks. Another big market for Treatt is alcoholic, low-calorie, flavoured fizzy water, known as hard seltzers. These alcopop equivalents for today’s more health-conscious drinker are huge in the United States, having taken almost 10 per cent share of the retail beer market there, and are beginning to grow in Britain and Europe.
In May, Treatt said that total sales were up by 13.5 per cent in the first half, prompting a flurry of earnings upgrades from analysts that follow the stock. Charles Hall at Peel Hunt said that the most encouraging aspect of those results was the fact that they had been achieved before Treatt moves into its new factory in Bury St Edmunds. Treatt has invested £41 million in this facility, which will enable the company to increase production significantly, as well as to work on research and development in partnership with food and drinks manufacturers. That inevitably leads to winning more contracts and will fuel long-term growth, because once Treatt gets one of its flavours into a product, it tends to stay in that product. Changing ingredients is simply not worth the cost and risk to the manufacturer.
Investors love this about the flavours and fragrances sector, meaning that Treatt and its peers trade on eye-watering valuations. Treatt’s shares are changing hands for £11.40, about 39 times Hall’s forecast for earnings in the year ending in September 2022, with a dividend yield of 0.5 per cent.
He is still a buyer at that price, pointing to the huge growth potential as the company increases production at its new facility and the fact that it may well become an acquisition target for one of the larger international flavours companies.
ADVICE Buy
WHY New factory will drive rapid growth
IMPACT Helping to wean the world off sugar and meat
Corbion
About a quarter of the food produced is wasted, having been spoiled or lost in supply chains, or thrown away by retailers, restaurants and consumers. The production, shipping and spoiling accounts for about 6 per cent of global greenhouse gas emissions, so tackling food waste is an easy win in the fight against climate change.
Corbion makes natural preservatives for bread, meat and other foods. The Dutch food and biochemicals company has adapted to the trend for clean label products, using preservatives such as vinegar, which shoppers feel comfortable with, and has helped manufacturers to cut sugar in bakery products. Sales were strong during the pandemic as more people ate at home, and that has continued into the first quarter.
While the food division represents more than half of sales, Corbion also sells biochemicals, used in products from microchips to hand sanitisers, and biomaterials, for orthopaedic devices — all made from lactic acid and its derivatives, which are renewable. It has a joint venture with Total to make polylactic acid (PLA), a bioplastic that is biodegradable and can be used for things like yoghurt pots. Demand for PLA has grown by more than 20 per cent a year in the shift away from single-use plastics.
That has pushed up the price of PLA and the joint venture has had margins of about 40 per cent. Sebastian Bray, an analyst at Berenberg, says that is not sustainable. While Corbion and Total have a head start, it is likely that Chinese producers will bring PLA prices down over the next five years.
The shares change hands for about €46, or 35 times forecast earnings, with a dividend yield of 1.6 per cent. While its food business is strong, the uncertainty over the price of PLA makes Corbion one to watch.
ADVICE Hold
WHY Growth in the polylactic acid sector may not be as strong as hoped
IMPACT Making plastics from renewable resources
