Share of the Week

	Tate and Lyle		symbol:TATE

 

Tate and Lyle is a name familiar across the breakfast tables of Britain. But the company has wider ambitions than simply filling up your sugar bowl; it produces a range of other food and industrial ingredients.

 

Life has however not been completely sweet for Tate and Lyle in recent years. In the first half of this year, performance in its sugars division was hit by the final period of EU sugar market reform, with sugar surpluses and downwards pressure on prices. And, while Tate and Lyle’s artificial sweetener, Sucralose (perhaps more familiar under its Splenda brand name) is a market leader in several respects, capacity utilisation at the firm’s Sucralose plants remains below capacity following a period of perhaps over-rapid expansion. Overall, the company’s returns on investment in recent years have been notably poor.

 

Now things may be getting better. There is a new focus on reducing capital expenditure and costs, boosting cashflow and reducing net debt. With a new head from Reckitt Benckiser, we believe that the focus on working capital will only increase. We think that Tate and Lyle could be debt-free in 3-4 years, which might have positive implications for dividends.

 

At the same time, market conditions for many of the firm’s products appear to be improving. Demand for high fructose syrup (HFS), a key output of the firm’s US food and industrial ingredients division, now appears to be picking up, easing overcapacity problems. At the same time, higher petrol prices are helping to boost demand for ethanol, a by-product of the HFS process. In Europe, margins on starch production have been boosted by lower costs, and the EU sugar market finally appears to be stabilising.

 

Sucralose volumes are also rising, being up by 15% worldwide in the first half of this year, although underlying growth probably falls back to 10% once retailers’ restocking effects are excluded. Higher sugar prices are helping Sucralose to take market share, and its “zero calorie” status obviously appeals in an increasingly health-conscious world. Of course, Sucralose margins may not be sustained as competitors step up pressure and, as with the company’s other operations, foreign exchange risk is important.

 

However, for the moment this is a solid story of better financial control combining with a better market conditions: a toothsome tale indeed.

 

 

This article was based on research produced by Barclays Wealth and represents the view held on 13-11-09.

Tate and Lyle was upgraded to Accumulate from Neutral on 10-11-2009.

 

Last updated: 16 November 2009