Bottom Line: Tate can balance sweet and sour

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The Independent Online
NEIL SHAW, chairman of Tate & Lyle, may prefer the description 'agricultural processing', but there is little doubt that Tate is a commodity business.

That is clear from the fact that a bumper US sugar beet crop pushed margins there down to just 3.8 per cent, or less than half its 1991 level, in its first half.

The key question is how severely shareholders are affected by such ups and downs. Tate does seem to be making a reasonable fist of ironing out the worst of them. The geographic spread of its sugar businesses means that it should prosper in some areas while it suffers in others.

Its starch and sweeteners business also tends to follow a different cycle. Thus a 4.7 per cent drop in profits from its sugar business in the first half was more than offset by a 39 per cent increase from sweeteners and starches.

Those who recall the unexpected plunge in the group's 1992 profits will be all too aware that the two cycles do not always dovetail that neatly. But, unlike many of its colleagues in the food manufacturing sector, its dividend cover is high enough to allow it to at least hold its payment even in the lean years.

Similarly, interest cover of more than five times means that gearing of 84 per cent is less of a constraint on its expansion plans than it might seem - although a few more deals like yesterday's monosodium glutamate acquisition or the aborted Australian deal could start to strain its balance sheet.

Tate's optimism about sugar margins in the US prompted analysts to upgrade their forecasts by pounds 15m or so to about pounds 265m, or 36p of earnings. That puts the shares, down 10p at 434p yesterday, on a multiple of about 12 times, 20 per cent below the market. The commodity risks means the discount is understandable, but the 4.1 per cent yield will be enough to tempt buyers.