A prospect not to be sniffed at

Smaller Companies

AT THE heart of the battle for the pound in your pocket are sweet smells and delicious tastes. For a huge range of products, from soft drinks to cigarettes, toilet cleaners and toothpaste, it is often the fragrance or the flavour that determines which sells the best. In an arena where nothing can be left to chance (or nature alone), these flavours and fragrances are increasingly bought in from specialists who are emerging as exciting growth stars of the 1980s and 1990s.

The scale of the opportunity is indicated by the progress of the US multinational International Flavours & Fragrances, a business with sales measured in billions, profit margins around 25 per cent and a share price that has climbed from $6 (pounds 3.80) to more than $50 since 1982.

The UK stock market has a mini-sector in this industry in the form of Borthwicks, Treatt, and CPL Aromas. Treatt, which I have written about before, has been doing well, helped by the success of its Florida facility in supplying essential oils for orange-juice producers. But the UK company most like International Flavours & Fragrances and showing strong growth is CPL Aromas, based in Hertfordshire but with a growing worldwide network of sales offices and factories.

In combination with an excellent set of interim figures, the group has been hosting visits to its new Aromachem factory in Darlington, Yorkshire, a state-of-the-art facility for producing high-value aroma-chemicals for its own use and for sale. Production has begun, but a significant trading contribution is not expected before the next financial year, ending 31 March 1997.

There is great excitement about the potential of the new factory, but the company is growing apace from its established operations. Profits last year (to 31 March 1995) leapt from pounds 1.4m to just over pounds 2m and look poised to climb even faster this year after a better-than-expected 51 per cent rise in interim profits to pounds 1.4m. Growth has continued into the second half so far, suggesting that full-year profits could approach pounds 3m to drop the price/earnings ratio to around 19 at Friday's close of 346p.

That is not startlingly cheap, especially when compared with the historic p/e of 12.7 on which the shares were floated, at 150p, last June. But it does not look unreasonable. The company is winning business all over the world, including some chunky new customers such as the tobacco giant BAT, suggesting sales are going to keep powering ahead. Margins are improving. The co-founder, chair- man and principal shareholder, Terry Pickthall, points to the 25 per cent margins achieved by IF&F, and says he believes CPL should be able to increase its margins from around 11 to 15 per cent. Cautiously, he refuses to put a timetable on the improvement but agrees that it could happen over four to five years, implying a steady 1 per cent a year improvement.

All this suggests a potentially glittering outlook for the group and its shareholders. My hunch is that we could be looking at a sales progression over the next three years of pounds 30m, pounds 40m and pounds 50m, with between pounds 5m and pounds l0m of that from the new Aromachem facility. Even on a 10 per cent margin, that implies profits climbing from pounds 3m to pounds 5m by 1997/98, against the pounds 1m profit achieved in 1991/92. On a maintained 20 times p/e, that would take the shares to over pounds 6; and profits could usefully exceed my projections if the expected progress is made in bumping up margins.

Three Pickthalls on the board make the group unashamedly a family business. But there is a breadth of talent in management that goes well beyond the family. They are ambitious, too. As well as operations in Hong Kong, Germany, India, Brazil and the Pan-Andean Pact countries on the Pacific side of South America, acquisitions have added subsidiaries in France and Switzerland and even a joint venture in Syria.

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