Advance of a sugar daddy

SHARES Barely a sweet tooth remains untouched as Tate & Lyle expands across the world
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The Independent Online
As the end of his first year as chief executive of Tate & Lyle draws closer, life looks sweet for Larry Pillard, the American who took over from Sir Neil Shaw. Problems at Staley, Tate's big United States corn miller (maker of sticky syrups for drinks like Coca-Cola) look to be receding.

In his 15 years at the helm, Sir Neil recreated the company as a truly global player. It is a hard act for Mr Pillard to follow, but it seems they share a similar vision for Tate: making a business with worldwide interests.

Staley is one of the largest corn millers in North America. Bundaberg Sugar in Australia is the country's largest cane grower and owns half of Bundaberg Rum. Other operations cross southern Africa and Asia, as well as Europe.

From its roots in the heyday of British imperialism, the company has close ties with many emerging markets, which has allowed it to steal a lead on much of the competition. As Simon Gifford, the finance director, explains: "There is no one competitor who we keep bumping into everywhere we go." In other words, Tate is setting the pace for its competitors.

Five years ago, Tate made the decision to expand into industrialising countries. The rationale is simple. Its main markets - North America and Europe - were maturing and left little room to generate double-digit growth, especially with Tate's already high market share. In contrast, newly industrialised countries have younger populations, where, as GDP expands, more money will fall into consumer pockets and then satisfy the local sweet tooth.

Take Mexico. The demographics are ideal: 50 per cent of the population is under 15 years old. Unsurprisingly, it also has the highest per capita consumption of soft drinks in the world. Almex, Tate's Guadalajara-based Mexican operation, is a leading corn wet miller, producing high fructose syrups for the likes of Coca-Cola.

Last year, Tate embarked on a $71.5m (pounds 47m) greenfield investment in Vietnam, including a new sugar factory and plantations.

The company approaches each country on its own merits. It may decide to buy into an existing business or develop its own facilities, although it always insists on a joint-venture partner.

Mr Gifford is frank about the strategy: "Some of the deals will pay back with exceptional returns, but some of them won't."

Nor will the timing of any return be predictable. Tate & Lyle hopes to see an average payback of five years for these new investments, but each one will differ. A cane mill it bought in Zambia last year is already profitable; Vietnam will take a while to come good.

By the end of 1995, Tate had invested a total of pounds 129m in new overseas markets. As some critics were quick to point out, however, it had only earned pounds 4m in profits on that expenditure. Mr Gifford is sanguine. "Our investment expenditure will continue to run at these levels for a couple more years; we reached break-even at pounds 73m," he says.

Closer to home, Tate is also pushing ahead. A new wheat starch plant under construction in northern France will be Europe's biggest, and will allow the company to service the entire European market, with surplus capacity for exports.

Starch may seem dull compared to sugar: its main use is in paper preparation, building materials like plasterboard and as a fat replacement in low-calorie foods. But there is a ripple of excitement in the starch industry over its holy grail: the quest to use starch as a biodegradable plastic.

Tate, along with several companies, is in the race for such a product. If Tate were to get there first, it could prove a massive money-spinner. But the company lacks a track record in exploiting highly innovative products. Ten years ago, its sucralose, an artificial sweetener, was hailed as a potential gold mine. Today, the company still awaits approval from the US Food and Drug Administration for use of sucralose in the US.

The shares have been volatile this year. The company was forced to issue a profits warning in May, at the time of its interim results, saying profits from Staley would be hit in the full year by more than $50m after the price of maize more than doubled.

Corn prices, the root of the problem, have come back to around $2.88 a bushel from highs of around $5 a bushel only six months ago. Although this suggests a respite in the corn squeeze, it will not be until January, when the next contracts between corn mills and suppliers are negotiated, that the market will know for sure if Staley is out of the mire. A consequence of the decision to stick to sugar and related products is that Tate is tied into commodity businesses - where prices can move very fast and disadvantageously.

But judging by the shares' performance against the market over the past decade, Tate & Lyle is proof there can be life in commodity markets, dull or not. The remaining uncertainty is reflected in a 4.2 per cent yield, a premium to the market. The shares are a long-term buy.

Tate & Lyle

Share price 484p

Prospective p/e 12.8*

Gross dividend yield 4.2%

Year to 30 Sep 1993 1994 1995 1996 1997*

Turnover (pounds m) 3,817.3 4,220.8 4,713.5 5,070 5,430

Pre-tax profits (pounds m) 222.5 273.8 311.1 276 300

Earnings p/s (p) 32.7 37.1 42.9 37.6 39.1

Dividend p/s (p) 13 14.4 16 17 18

*ABN-Amro Hoare Govett forecasts