Tate & Lyle Plc; Full Year Results Update – 02 June 2014
Tate & Lyle has been one of the world’s leading specialty food ingredient providers since it was formed through a merger of Henry Tate & Sons and Lyle’s Golden Syrup in 1921. The company discovered Sucralose (SPLENDA® Sucralose) during the 1970s and later disposed of its sugar business in order to focus on maintaining its position as the world’s dominant force in artificial sweeteners and specialty food ingredients.
SPLENDA® Sucralose has a 26% share of the global sweetener market by value, making Tate & Lyle the largest single intensity sweetener manufacturer in the world. By volume, SPLENDA® Sucralose accounts for 89% of the global sucralose market.
|Index||FTSE 250||Ticker||TATE.L||Latest Close||685.00|
|52 Week High||889.00||52 Week Low||618.00||P/E||12.27|
|Dividend Yield %||4.0||Dividend Cover||2.0||CEO:||Javed Ahmed|
Tate & Lyle Delivers Full Year Results; Profits Down but More Resilient than Anticipated
Since issuing a profit warning in February this year, Tate & Lyle shares have been plagued by scepticism as institutional investors, including Schroders and Teachers Advisors Inc, responded by cutting positions in the firm, leading to price weakness with an uncertain outlook.
May saw T&L management deliver full year results for 2013 where they announced a less than expected dent in the top and bottom line for the business over the year. The Specialty Food Ingredients (SFI) division was doubtlessly the star performer for the period, with a 4% increase in sales translating into a 1% increase in operating profit.
While the consequent increase in profits for the SFI division is low by historical standards, given the reduction in SPLENDA® Sucralose margins, strong growth trends in demand across Europe, Asia and Latin America bode well for future earnings.
On a slightly less positive note, the bulk ingredients business under-performed once again following an extended winter in the US and weaker demand for liquid corn sweeteners during the warmer parts of the year. Sales in the division fell by 6% over the period, translating into a 4% reduction in operating profits.
As a result, the net effect has been that profits in the SFI division were offset by the decline in bulk ingredients, which left real diluted EPS for the year 1.6% lower than in the previous period. On a constant currency basis, earnings between periods were largely flat.
While under normal circumstances such results would amount to an incredibly poor showing, in the case of T&L they are actually much better than many had expected, hence the minor gain in share price upon release.
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Chinese Competition Update and Outlook
While Chinese competitors have kept margins for T&L’s flagship SPLENDA® Sucralose product under pressure for some time, Tate & Lyle remains the larger entity with greater economies of scale, more efficient technology and production practices as well as a stronger balance sheet.
Although no exact figures are readily available, management have previously described T&L’s cost of production as significantly lower than that of competitors, while production capacity is also thought to be much greater.
This leaves us sceptical of the longer-term threat posed by Chinese competitors as falling prices will hurt both sides of the field, and when it comes to a battle of the balance sheets, T&L has greater financial resources and thus better chances of success.
M&A Speculation Underpinning Investor Hopes for Tate & Lyle Plc
Tate & Lyle shares leapt in late April following takeover speculation that Bunge, a US agribusiness, was considering a bid for the group with a rumoured offer of 850.00 pence per share. So far, no official offer has been made; however, now that talk is on the table any weakness in the shares could attract further speculative buying until such a time as the rumours are officially discounted.
Although these things are always difficult to predict, we do feel that for any potential takeover attempt to have any prospect of success, the rumoured offer price would require substantial revision to the upside.
At the very least, any formal offer at 850.00 pence would likely be met with stiff opposition from both management and shareholders, given the dominant position of T&L in the high intensity sweeteners arena and the strong growth prospects of the industry as a whole.
Our view is that a successful offer would require a greater premium than the rumoured offer price (15.2 X 2013 earnings) currently implies. With the shares presently trading on a multiple of 12.27 X earnings, we feel a more palatable valuation for shareholders would entail a bid of between 18 and 21 X 2013 earnings.
This would imply an offer price that comes in somewhere between 1,002.00 and 1,169.00 pence for shares currently trading at 685.00 pence.
The Road Ahead for Tate & Lyle
In terms of strategy, Tate & Lyle continues to support its SFI business with investment from income earned at the bulk ingredients operation, and has maintained its focus upon the development of products that tap into an established trend towards healthier living in both developed as well as emerging markets.
Key areas of focus for T&L are on fibre supplements in the SFI division and salt reduction technology in the food systems business.
In relation to salt reduction, Tate & Lyle signed an agreement with Eminate Ltd, a subsidiary of the University of Nottingham, in 2011, which gives it exclusive rights to market in SODA-LO® salt microspheres. These are essentially the salt equivalent of SPLENDA® Sucralose. Acting as a partial substitute in a range of goods, SODA-LO® can reduce the real salt content of food items by 30-50%.
The group is currently engaged in SODA-LO® projects with approximately 300 of its clients, which will see the salt content of various types of foods, including snacks, reduced to levels more in line with official guidelines. Should these early stage projects continue to prove a success then SODA-LO® technology could begin to gain greater traction on a larger scale.
Another key growth area for the group is polydextrose fibre technology. Tate & Lyle currently produces PROMITOR® Soluble Corn Fibre, PROMITOR® Soluble Gluco Fibre and PromOat® Beta Glucan across a number of sites globally and has recently increased its production capacity through acquisitions in both China and Sweden.
Polydextrose products reduce calories in certain types of foods by replacing some of the sugar, starch and fat content with an increased amount of fibre, which aids digestion and reduces obesity risk.
Balance Sheet, Valuation and Dividend
From a valuation perspective, T&L currently trades on a multiple of 12.27 X 2013 earnings, which is a distance below the average for the consumer goods sector (17.62 X) as well as the average for the beverages segment of the consumer goods sector (21.48 X). T&L currently trades in line with the food producers listed in the consumer goods sector which have an average earnings multiple of 12.59 X 2013 earnings.
Given that T&L produce ingredients for both the food and beverage sector, but not any actual foods or drinks, the exercise of comparison is somewhat subjective. Nevertheless, by any benchmark it is clear to see that the shares are far from over valued.
In relation to dividends, management increased the pay-out to shareholders by 5.3% to 27.6 pence over 2013, which equates to a yield of 4.0% based upon today’s prices. The group operates a progressive dividend policy where it aims to grow the pay-out to shareholders in line with the business’s overall growth.
In terms of debt, net borrowings fell by just over 26% throughout the period, which reduced interest expenses as well as risks attached to the balance sheet during the transition of core markets toward a rising rate environment.
Despite the fact that pressure upon SPLENDA® Sucralose margins and falling sales in the US bulk ingredients market are likely to prove a weight around the ankles of the shares over the near to medium term, strong growth trends across Europe, Asia and Latin America offer the potential to at least partially mitigate the effect upon earnings.
In addition to this, the future for both Specialty Foods and Food Systems divisions remains bright, with a strong innovative product pipeline that addresses global needs and demand, supporting growth expectations over the medium term.
This is while takeover speculation also has the potential to underpin the shares throughout the near term, with any price weakness being met by speculative buying until such a time as the rumours are either confirmed or denounced.
From a valuation perspective, we believe that there is room for current earnings multiple to expand further. A reducing debt pile and the consequently lower servicing costs support expectations for greater free cash flows over the months ahead, which should in turn provide a cushion against any potential earnings volatility to arise from near term competitive pressures.
In relation to price targets, we are encouraged that the shares have shown clear signs of establishing a trend toward the upside and continue to see strong support at, or around, the 650.00 pence level. Looking toward the upside, we feel a price target of 775.00 is a more realistic expectation for the 2014 year; however, our longer-term price target of 820.00 pence per share also remains in place and unchanged.
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