The Investment Column: Outlook sours for Tate & Lyle

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The Independent Online
Tate & Lyle's profits warning yesterday left a bitter taste in the mouth. The announcement that earnings would be flat for the year to September took the market completely by surprise and sent the shares down 41p to 507p.

To be fair, the group is hardly to blame for the outbreak of a sugar beet disease in Nebraska which wiped out its crops and will knock pounds 12m off the bottom line this year.

However, news of cost overruns in its new pounds 300m starch plant in northern France is of more concern. There were also worrying noises about intense competition in the European and US sweeteners and starch markets.

It is not all bad news. There should an upturn this year at Staley, which makes corn syrup for soft drinks. The annual corn syrup prices are currently being negotiated and the signs are they could show a healthy rise this year. However, US profits could still be flat, with any improvement at Staley offset by problems elsewhere.

That said, investors should take a longer-term view. The group's movement into higher-margin modified starches is well founded. Extensive cost- cutting has meant Staley has been a resilient performer, even during the hard times. And Tate & Lyle's heavy expenditure programme will begin to pay off next year.

Analysts have downgraded profits by pounds 20m to pounds 240m, putting the shares on a prospective price-earnings ratio of 15.

Tate & Lyle's shares have had a strong run in the past few months and yesterday's price fall points to the fact that its rating probably rose too quickly, too soon. After all, Tate & Lyle remains a cyclical business and the pounds 311m profit it made in 1995 is already a distant memory. However, shareholders should hold on to reap benefits of the group's investment.

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