The Investment Column: Take a sweet profit on Tate & Lyle

Wait for Ottakar's to turn over a new leaf - Stop-loss pushes Harvey Nash out of our portfolio
Click to follow

Iain Ferguson is all about "value-added". The farmer's son took over the running of Tate & Lyle, the sugar and starch company, in May 2003 and has moved its focus from low-margin commodities to what he calls "value-added", high-margin, innovative food ingredients. Suddenly, Tate & Lyle looked a less volatile business, one with growth prospects, one which deserved a higher stock market rating. As a result, he has created a "value-added" share price, up 85 per cent, propelling the company back into the FTSE 100. He was recently named Forbes magazine's businessman of the year.

Iain Ferguson is all about "value-added". The farmer's son took over the running of Tate & Lyle, the sugar and starch company, in May 2003 and has moved its focus from low-margin commodities to what he calls "value-added", high-margin, innovative food ingredients. Suddenly, Tate & Lyle looked a less volatile business, one with growth prospects, one which deserved a higher stock market rating. As a result, he has created a "value-added" share price, up 85 per cent, propelling the company back into the FTSE 100. He was recently named Forbes magazine's businessman of the year.

The company's greatest success to date has been sucralose, a new artificial sweetener which you might have seen in packet form in canteens and restaurants under the Splenda brand. Its claim to superiority is that it has no calories. Sales are booming, both to the consumer and as a food ingredient, most notably for a new Diet Coke. Tate & Lyle's factories are working flat out to keep up with demand and the company is investing heavily to boost capacity for next year and, with the opening of a new factory in Singapore, from early 2007.

Which is just in time, because from the middle of next year there will be a big upheaval in the European sugar market. Tate & Lyle is the UK's largest recipient of money under Europe's Common Agricultural Policy (£127m in 2003/04) thanks to subsidies for its exports. The trouble is many of these subsidies must end, and European sugar prices, now three times higher than in the rest of the world, will have to come down to more normal levels. Production is likely to fall. Tate & Lyle could well have a lean and mean sugar-refining business at the end of the changeover, but it is very difficult to imagine an up year for earnings in 2007 - a fact that will increasingly weigh on investors' minds. A trading update yesterday warned that margins are already coming under pressure.

We said buy at 366.5p last year, but the stock now trades on 14 times 2006's peak-year earnings. Sell.

Wait for Ottakar's to turn over a new leaf

If Ottakar was a character in one of the story books it sells, then his most recent adventure would make pretty dispiriting reading.

In Ottakar and the Mystery of the Bookshop Chain That Grew Too Quickly, our hero comes unstuck when he belatedly realises that running 131 bookshops across the UK is not easy. The Ottakar's finance director died a grisly death last November for letting the company's costs spiral out of control. A profits warning followed two months later.

The new FD, Michael Hitchcock, was all talk yesterday about how the next chapter in the quest for retail dominance would be about installing "big company" systems.

The great challenge for Ottakar's is working out how to continue growing - it sees scope for more than 200 new stores - in a slowing retail environment, while controlling its costs.

Yesterday's preliminary results showed pre-tax profits had risen 16 per cent to £7m, but this was below expectations. Although better buying boosted the gross margin, operating expenses rose 17 per cent on the back of higher wages and rents.

Since its January year-end, Ottakar's has found life tougher and sales are down 1.6 per cent. We like the company but, like our hero, we were caught unawares by the dip in its fortunes. Existing shareholders should hold on. New readers should wait for a new chapter.

Stop-loss pushes Harvey Nash out of our portfolio

Harsh. The Independent's portfolio of share tips for 2005 has to let go of Harvey Nash, the IT recruitment specialist. We introduced a "stop-loss" strategy in an effort to make this annual ritual a bit more like the way our readers ought to be investing. Yesterday, Harvey Nash fell more than 20 per cent below its peak for the year. We tipped the shares at 90.5p. Now they are 75p, a loss of 17.1 per cent.

It is particularly upsetting because the steep fall has not come as a result of bad news from the company. Indeed, there has been so little trading of the shares that we can't even detect an expectation of bad news to come.

Last year was a strong one for the IT recruitment industry, as businesses in the UK and US regained their confidence, dusted off big computer projects and demanded IT consultants and permanent staff to implement them. We last heard from Harvey Nash in February, when it said full-year revenues were up 25 per cent and profits in line with forecasts. Rivals have said that the UK industry at least is still growing at a decent clip.

So what might be going wrong? Harvey Nash does not have the strongest balance sheet in the industry, and cash constraints might mean it cannot compete agressively for new business. It might have failed to return its Continental European operations to growth because of high unemployment there. Results are out on 25 April, when we will find out. For the company's place in our portfolio, however, it is too late.

Comments