Market Report: Tate & Lyle tumbles on sucralose concerns

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The Independent Online

Morgan Stanley called time on Tate & Lyle's soaraway share price as the heavyweight broker published detailed research arguing that the City is far too optimistic about the sugar producer's ability to hold on to market share for sucralose, its zero-calorie sweetener, once its patent expires.

Central to the performance of Tate & Lyle's shares these days is sucralose, and yesterday's cautious comments from Morgan Stanley left the stock 12p lower at 567.5p.

The US broker looked at what happened to Tate & Lyle's fellow sweetener NutraSweet when it was exposed to competition and argued that sucralose is likely to suffer a very sharp drop in profits margins. "Within three years of generic competition to sucralose its price will decline by 30 per cent, Tate & Lyle will lose 30 per cent share in the market and its earnings margins will drop from 48 per cent to 10 per cent," Morgan Stanley predicted.

The broker also warned that it is by no means certain that Tate & Lyle can hold on to its monopoly in the zero-calorie sweetener arena until 2018, when its patent expires. It believes there is a possibility someone will come up with an as-yet undiscovered way to make sucralose efficiently. Given such concerns, Morgan Stanley slapped an "underweight" rating on the sugar manufacturer, saying that the "long-term fundamentals of sucralose do not support the current share price".

After a volatile session, the FTSE 100 finished just 2 points higher at 5,531. Meanwhile, the FTSE 250 was hit by a serious bout of profit-taking and lost 60 points to 8,444. Marks & Spencer rose 16.75p to 472.25p on talk the retailer has enjoyed a pick-up in sales over the past few weeks. Market professionals reckon the jump in the stock was exacerbated by a series of hedge funds finally closing long-term bear positions in the stock.

Anyone short of Marks & Spencer since the summer will have felt significant financial pain. Shares in the group have soured by one-third since the end of August.

SkyePharma ticked 0.25p higher at 51.25p after the group confirmed that a number of parties are interested in buying the biotech. Dealers reported heavy demand forRegus, 5.5p higher at 103.5p, in the final hour of trading amid vague whispers of a possible bid for the office space group.

Elementis jumped 2.5p to 74p as Hanover Investors raised its stake in the speciality chemicals maker to 16.1 per cent. The US value fund has already made a substantial profit on its stake in Elementis, which it bought at nearly half the price. Hanover has a history of taking big stakes in undervalued UK companies and then pushing through a restructuring.

It has done exactly that at the chemicals group, but in the longer term Hanover will need to think about an exit from the company. Given the size of its stake, this will most probably see the Elementis sold to a bigger player.

Elsewhere, Ottakar's added 3p to 370.5p after KBC Peel Hunt argued that the Office of Fair Trading's decision to refer HMV's bid for the company has merely delayed the inevitable merger of the two. In the meantime, however, the broker warned that bad news is on the way from Ottakar's. It predicts the bookseller will issue a severe profits warning next week because ofintense competition in the sector. As a result, KBC has slashed its profits forecasts from £6m to £1m.

But Ottakar's' shareholders should not be too disheartened. The broker does not believe the company's value will be dented too much, given its strategic importance to HMV and WH Smith.

KBC said it would not be surprised if WH Smithemerges as a rival bidder to HMV. Such a scenario could result in Ottakar's being taken over at up to 440p a share, according to the broker.

Walker Greenbank ticked 0.25p higher at 18.75p after John Sach, the chief executive of the wallpaper and textiles group, disclosed the purchase of 30,000 shares at 18.75p. JD Group dropped 19.5p to 239p on fears Mike Ashley, the retail entrepreneur who just last month look a 20 per cent stake in the company, is looking to sell down his shareholding. Mr Ashley has already sold a good chunk of his JD Group shares at a loss and has been aggressively reducing his holding in its rival JJB Sports.

Finally, Dolphin Capital Investor had an impressive debut on the Alternative Investment Market, having raised £70m through a placing at 68p. Its stock closed at 75.5p amid excitement about the big names behind the South-eastern Europe focused resorts developer. The US hedge fund Fortress will hold a largestake in the group, to be run by Miltos Kambourides and Pierre Charalambides, former partners at Soros Real Estate.

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