Investment View: Tate & Lyle's sugar rush has waned so it's time to scoop some profits


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The Independent Online

Tate & Lyle: Our view: Hold

Javed Ahmed is one of a small number of chief executives who can say he has made a real and tangible difference to the business which his shareholders appointed him to run without generating a cynical response.

A look at where the shares stood when he joined and where they stand now tells its own story. Tate & Lyle was in the investment doghouse for years. There were profit warnings, there was a stalling share price, there was no reason to invest, really.

Since then, however, the stock has acquired some real momentum. Handy, then, that the Independent has been suggesting a buy for a couple of years now.

The last time this column took a look was in November 2010 when we again said "keep buying" at 524.5p. Apart from a brief wobble (last summer when the market nosedived) that has proved sage advice. The shares have been on the up ever since.

Mr Ahmed is certainly no sweetie – file under the heading "ruthless American CEO" – but he has pulled the business up by the scruff ofits neck.

The question is, have the shares now simply reached the sort of level they ought to have been at had the company been run a bit better or is now the time to take profits?

Mr Ahmed has certainly not been afraid of hard decisions. Those include selling Tate & Lyle's iconic European sugar-refining business and its London golden syrup factory to American Sugar Refining, also in 2010.

The disposal included the sale of the rights to use that historic brand name. Lyle's golden syrup is by some estimations the world's oldest brand.

The corporate Tate & Lyle's portfolio of agribusinesses has been reshaped to focus on higher-margin areas or "value-added" businesses, including supplying sweeteners, bulk starches and ethanol. You'll find the company's wares in any number of products, including soups, sauces and dressings.

Artificial sweeteners are an important product in the form of Splenda, or sucralose, which is calorie free but made from sugar. However, investors need to keep a close eye on the competitive impact of extracts from the Stevia plant. Already the market leader in Japan, it is steadily overcoming regulatory resistance elsewhere.

In the more immediate term, Tate & Lyle endured a rather soft third quarter. Sucralose volume growth was slower than in the first half (although it was always going to be tough for the company to match this).

Strong demand from Mexico and North America helped bulk ingredients although co-products (think corn and what comes from it) was soft compared with the first half.

Not the most stunning quarter, then, but as analysts at Charles Stanley note, Tate & Lyle sensibly adopted a defensive stance. A fourth-quarter update is due next week.

As to the financials, debt, once something of a bugbear, now looks very manageable at 0.9 times earnings for interest, tax, depreciation and amortisation.

Which brings us to valuation. Tate & Lyle now trades on just under 13 times forecast full-year earnings for 2011 while the once-compelling yield is now merely ordinary at a prospective 3.5 per cent. The decline in the latter is a reflection of just how well the shares have been growing, and the company has been returning more capital to shareholders by buying them back.

All the same, the attractions of the stock are less obvious than when we were riding this horse on the way up.

Long term the arguments in favour of investing in this sort of agribusiness are sound. It operates in a growing market because the world has a growing population of people with the ability to pay for products containing that stuff Tate & Lyle produces and ships.

However, investors looking for exciting growth might now be best advised to take some profits. The sweetest part of Tate & Lyle's revival is now over and it will be tough for the shares to maintain their momentum from here.

Long term, though, I'd still be a holder of this stock.