Tate & Lyle Plc Flash Update – 05 February 2015

Company Overview

Tate and 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.

Index FTSE 250 Ticker TATE.L Latest Close 664.0
52 Week High 790.00 52 Week Low 551.50 P/E (F) 15.1
Dividend Yield %  (E) 4.8 Dividend Cover (E) 1.4 CEO: Javed Ahmed
CFO: Nick Hampton Previous Price Target 560.00 Current Price target 501.00

Tate & Lyle shares plunge as management warn on profits again

Following a tough trading year for Tate & Lyle, a volley of profit warnings have seen the shares falling to a 3 ½ year low of 551.00 pence in December, taking out our price target of 560.00 pence in the process.

Now as we head into year end the road ahead for management at Tate & Lyle Plc appears to offer little respite. This is as the opening week of February saw the group issue its Q3 trading statement, in which, management announced a further downgrade to the full year outlook for earnings.

In detail, the group now expects full year profits to be “modestly below” the revised range announced in September 2014 (£230 – £245 million), while net debt for the year is expected to be somewhat higher than in 2013.

The downward revision to profit forecasts comes as competition in the Sucralose market continues to increase, while revenues remain under pressure in the bulk ingredients division due to volatile corn prices and uncertain demand for the group’s high fructose corn syrup (HFCS).

The movement in liabilities is believed to be the result of a small number of acquisitions and adverse movements in foreign exchange rates.

On a more positive note, management also announced at the most recent update that new product launches from the specialty food ingredients division continue to meet with a warm reception from customers, although these are yet to translate into a positive impact upon both the top and bottom line for the group.

Tate & Lyle Plc Share Price / Daily Intervals


Balance sheet, dividend and valuation update

In terms of the balance sheet, net debt increased by 21% during the three months to December as a result of the group’s acquisition of a majority stake in Gemacom and its purchase of distribution rights in Asia. FX movements are also believed to have had an adverse impact upon the liability position.  

Although the “deployment of the balance sheet” is a key part of management strategy for growth, we are mindful that this strategy is yet to bear any fruit of note, while the events of the recent quarter will have had a substantial impact upon net debt/ equity.

This is an area we will watch closely going forward as given recent history and the current outlook for the group’s Sucralose & bulk ingredients operations, it is difficult to imagine that shareholders will be willing to tolerate a strategy which further depresses returns on equity & capital for too long a period.

In relation to the dividend, we see little prospect for substantial growth at Tate & Lyle Plc, although on the same note we also see little danger of an immediate cut to the payout. At present consensus expectations suggest that total dividends for the year will remain static at 27.6 pence, while EPS is likely to be considerably lower than in the previous year at 38.4 pence for 2014.

This will reduce dividend cover to just 1.4X although, in light of higher earnings expectations for the 2015/16 year, we believe that management will opt to look through this decline in order to avoid a shareholder revolt. However, if earnings momentum were to remain toward the downside in 2015 then it is highly likely that for the dividends will be somewhat lower for the year ending in March 2016.

From a valuation perspective, we note a sustained deterioration in expectations for the current year at Tate & Lyle Plc, which leaves us uncomfortable with a valuation which is currently someway above its long term average (3-5 Yr) of just over 13X earnings.

Therefore, at nearly 15X the revised consensus for 2014/15, we see Tate & Lyle Plc as overvalued at current levels.


The takeaway – reducing our expectations for Tate & Lyle Plc 

While we continue to believe that there is an attractive investment case for Tate & Lyle over the longer term, repeated downgrades to the full year outlook for earnings have now led the group’s multiples based valuation to become inflated.

Given the headwinds facing the group we see little reason to support a valuation that is above its longer term average and therefore, believe that the shares could still fall further from their current levels during the months ahead.

With this in mind, we reduce our price target for the shares today, from 560.00 pence down to 501.00 pence. This is for shares currently trading at 574.00 pence, which corresponds with an earnings multiple of 13X and implies downside of 12.7% from the current level.

The next scheduled event of note for Tate & Lyle Plc is the release of a full year trading statement on 02 April 2015. As always, we will endeavour to keep all of our members up to date with developments surrounding TATE.L as they occur as well as at the time of the next release.


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