Tate & Lyle Plc; Interim Update – 24 July 2014

After a quarter spent strumming along the bottom of a barrel, between 629.00 and 700.00 pence, Tate & Lyle released its interim management statement covering Q1 of the new financial year. In keeping with the light and dark nature of its content, the management update met with a mixed reaction from the market.

On the downside, an industrial accident led to the temporary shutdown of a Sucralose production facility in Singapore that resulted in a £3 million charge to the income statement for costs arising from lost production.

This was while the drawdown of inventories that stemmed from production stoppages in North America during the polar vortex earlier this year led to lower sales volumes in Bulk Ingredients between April and July.

Overall earnings were lower than initially anticipated during Q1, which leaves Tate & Lyle with little margin for error throughout the remainder of the year. The shares dropped in response to the morning announcement, before encountering support at the 650.00-pence level.

Looking further out, and in line with previous guidance, management still expect that Sucralose selling prices will be in the region of 15% lower by the close of 2015. As a result, earnings during the subsequent financial year could be largely flat or lower than at present, despite what is still a healthy rate of growth in volumes across the division.

When combined with the performance for Q1 there is a risk that, facing a sustained period of earnings constraints, investors could become disenchanted, which does pose a risk to the shares and, consequently, our outlook for them.

Nevertheless, our view remains that the Tate & Lyle story is far from over. On the plus side, the group has a strong R&D pipeline with 35 development projects at various milestones along the road to completion, spanning the full divisional breadth of the business.

In addition, the group’s core and higher margin products, such as those within the Specialty Foods Division, continue to gain market share through persistent volume growth. This is while the group’s overall financial position continues to improve with the reduction of balance sheet leveraged, aided over the most recent period by favourable movements in foreign exchange rates.

Further from here, T&L’s earlier agreement with McNeil Nutritionals LLC relating to the supply of table top sweetener expired last year. When this agreement expired, so too did Tate & Lyle’s pledge not to enter the table top sweetener arena, which in the words of Javed Ahmed (CEO), opens up a global market that is almost completely new to the group.

In summary, Tate & Lyle Plc continues to face challenges in core markets and has, over the course of Q1, suffered unforeseeable setbacks in its production schedule within two key business units. While management still expect full year earnings to be in line with previous guidance, the events of Q1 leave T&L with less of a margin for error going forward and could also see the shares remain under pressure throughout the near term.

Despite this, we remain upbeat about the medium to longer-term outlook for the group. With a strong specialty foods portfolio, and the growth drivers of this high-margin area still very much in place, we see T&L as having room to compensate for lower Sucralose prices with steady volume growth over the quarters ahead.

Further, the group maintains a well-furnished R&D pipeline and management have continued to focus their efforts upon reducing debt and driving through improvements in efficiency.

Consequently, we maintain our pre-existing price target at 775.00 pence and 820.00 pence for Tate and Lyle Plc, although we acknowledge that these may not be seen within the 2014 year.

The next event of significance for the group is the release of half-year results, due on 06 November. Accordingly, we shall review both the financial performance of the business as well as the shares at this time.

Tate & Lyle Share Price Hourly Intervals



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