James Moore: The long-term outlook is looking pretty sweet for Tate & Lyle
Investment View: If you invest in this company you'll have to put up with some volatility
Tate & Lyle
Our view Buy on Weakness
Price 730p (-4p)
The City's reaction to Tate & Lyle's half-year results yesterday was more bitter than sweet. The headlines said profits were hit by the cost of reopening an American factory that makes "Splenda" artificial sweeteners, combined with the tough conditions that face almost any company that does business in Europe.
Although sales role 7 per cent to £1.63bn in the first half of the business' financial year, adjusted earnings came in it £179m, up by just 2 per cent. No wonder the shares were under pressure in the market yesterday, then.
If you invest in this company you'll have to put up with volatility. Since I last looked at the stock on 20 March, the shares have been all over the place.
For most of the intervening months they have been well below that level, hitting a low of 633.5p in June before roaring back in September and October, not without the support of some brokers who felt the shares could go higher still.
At that time I said "hold" at 704p for the longer term, although I advised that people who'd bought in at 524.5p, when The Independent first started going sweet on the operation, might want to take some profits.
There's been some profit taking among City institutions recently, so the shares are now a little way off the 12-month high 738.5p recorded a couple of weeks ago, and the slightly disappointing results might see them drifting for a while longer.
Tate & Lyle no longer owns the iconic European sugar-refining business that bore its name which, along with its London golden syrup factory, were sold to American Sugar Refining in 2010, together with the rights to the historic "Lyle's Golden Syrup" brand name.
Indulging in some corporate verbal diarrhea, the company now calls itself "a global provider of distinctive, high-quality ingredients and solutions to the food, beverage and other industries". In other word's it is a multinational agri-business.
What this means is that its products can be found in any number of different food items which you were probably unaware of – from toast (soluble corn fibre) to yogurt (starches to provide texture) to jam (fructose sweetners). You may even find its industrial starches in your office.
The growth potential in some of its key areas are clear.
For artificial sweetners there's the world's sweet tooth and mounting concern about obesity, while animal feed should do well from rising meat consumption in fast-growing economies like China's.
Then there are bioproducts, which are not uncontroversial but provide an alternative to fossil-based hydrocarbons. And so it goes on.
Margins are also very solid, although they were hit in the recent reporting period by a lengthy strike/lock out in Turkey which doesn't reflect all that well on the company (note to management, if you work with your staff you get more out of them).
So even if the company's results this time around weren't exactly thrilling, the long-term outlook is actually rather positive.
There are still some headwinds: a big part of the business is reliant on corn and the drought in America's mid-west made for a rotten harvest with hot and dry conditions in Europe meaning it wasn't able to pick up the slack. So costs are up and the supply chain has been affected.
What's more, the company isn't all that cheap, based on its earnings multiple of 13 times forecasts for the year ending 31 March 2013. The yield is no better better than average, at a prospective 3.5 per cent, although that's more than two times covered and the company's debt levels are relatively light, and falling.
I'd stick with the advice to hold. But if the shares continue falling, to the extent that they start to dip below the 650p level again, I might be inclined to stash a few more away.
Tate & Lyle is a generally well-run outfit that should continue to provide a quality return. So hold for now, but buy on any weakness.
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