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PureCircle could be sweet for investors

Stevia is a sugar substitute and the group has a 75% share of the industry
PureCircle could be sweet for investors
The group uses sugar substitute stevia to make a range of products

Potential growth at Stevia firm PureCircle Limited (LON:PURE) looks sweet and now could be a good time for investors to take advantage.

Stevia is a sugar substitute and the group, which produces and markets it and has a 75% share of the industry. The firm has over 20 products, derived from the same type of plant, which have already been commercialised.

It sells across 59 countries and  customers include the giants Nestle, Coca Cola, Kraft and Unilever.

The company is also expanding its production facilities to 5,000 tonnes from 2,800 tonnes at a cost of US$42mln, and the new facility in Malaysia should be completed in 2017 and take sales capacity to US$500mln.

Full year results show progress despite challenges

PureCircle is profitable and reported sales for the  year to June 30, 2016 of US$138.6mln, up from US$127.3mln last year.

The gross margin improved 41% to US$57mln (2015: US$40.3mln), while the net profit after tax was 257% higher at US$14.6mln.

EPS (earnings per share) rose 242% to 8.49 US cents.

Significant milestones in the period were the approval of high purity stevia in India and Brazil, approval of Reb M (a product, which can reduce calories by 100% in fizzy drinks) in Europe and the launch of the Zeta new ingredients, which have the  most sugar-like taste and create the lowest calories.

US customs action causes delay

In June, the firm revealed that stevia shipments had been detained by US border control, based on an allegation, refuted by PureCircle, that they contained products produced using forced labor.

Three shipments were detained in June but later the same month they were cleared for release into the US.

PureCircle said this had played its part in lower than expected second half sales, along with delayed customer launches.

Indeed a number of the firm's shipments are still in in detention in the USA and the group continues to work with the authorities to address the matter and have its name removed from the WRO (Withhold Release Order), it told the final results.

House broker Liberum said the matter make it take a cautious stance and assumes no resolution until the second half of 2017 (to June 30 next year).

It says it has no doubt in PureCircle’s conviction that the allegations against it are inaccurate but unfortunately there is no clear timetable for customs to reach a final decision, and until it's cleared up theissue will slow the group's sales into the North American market and drive up the cost of doing business. It has reduced 2017 and 2018 EPS forecasts by 60% and 61% respectively.

Growth of Stevia set to soar

Liberum highlights that in the last five years the stevia market has more than doubled to over US$200mln, while PureCircle has been growing revenues at a compound annual growth rate of 32%. Yet Stevia is still just 0.2% of the overall sweeteners and  flavours market.

It also notes that 10,000 food and drink products have been launched around the world using stevia and it only received  European and Canadian approval for use as a food ingredient five years ago.

The sugar substitute is an important tool in the much talked fight against diseases like diabetes and obesity, and governments globally are under pressure to reduce sugar intake.

The World Health Organisation (WHO) says sugar intake should be restricted to no more than 10% of daily calorie intake, and ideally below 5%.

Valuation is undemanding

Liberum says that trading at 5.7 times enterprise value to sales, PureCircle's valuation is not demanding for a firm, which should deliver strong double-digit sales growth and even stronger profit growth

The broker bases long-term forecasts assuming that stevia can gain around 10% of the global sugar market and that PureCircle’s long-term market share falls to 25%, giving a 10-20 year revenue potential of around US$1.6bn for PureCircle.

The shares have been hit by recent challenges. We believe this represents a good entry point for investors, says Liberum, repeating a ‘buy’ rating.

Its target price of 500p, down from 600p still offers a hefty upside with shares currently at around 310p.

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PureCircle Limited Timeline

July 12 2016

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