After a troubled time which included a profit warning in May, food ingredients firm Tate & Lyle has issued a more positive update.
But after a revival in its shares since August, they have succumbed to some profit taking, down 14p or 2.4% at 565.5p. The company said trading in the first half was in line with expectations and its full year guidance remained unchanged. Speciality food ingredients performed ahead of the same time last year, while bulk ingredients benefited from solid demand for sweeteners, but commodities were hit by low ethanol margins in the US.
Analysts remained positive on the business. Martin Deboo at house broker Jefferies issued a buy note, saying:
Growth across speciality food ingredients, sucralose and bulk sweeteners & starches is proving sufficient to offset headwinds in ethanol. Tate is cautious as usual on the sweetener pricing round. We continue to think that this will conclude positively.
The scars of 2014 seem to have reinforced Tate’s penchant for cautious trading commentary. Underneath this, the second quarter update passes the sniff test for us: speciality food ingredient starches have returned to growth. Food Systems and, significantly, Sucralose, are growing volumes. Demand for Bulk Sweeteners is reported as solid. Only ethanol is spoiling the party.
Our newfound bullishness on Tate has been predicated on what we think has been a very strong sweetener (HFCS) Calendar 2016 pricing round in the US. We think this influences around 10% of group profits directly, a further 30% indirectly (via tolling), as well as being a barometer of Corn Wet Milling (CWM) economics generally, including SFI, which account for around 80% of profits. Somewhat to our surprise, Tate report that the round is still in progress for them. We continue to expect a more than satisfactory outcome, on the basis of trade press reporting.
The anodyne language [in the statement] belies the fact that Tate have now filed two sequential in-line trading updates, with no further negative surprises. A marked contrast with calendar 2014. The statement is silent on the calendar 2016 outlook in US CWM & Sucralose but our view remains that that outlook is improving. Granted, the shares are up 16% on the recent trough. But they are still just below the level in May, after consensus had ingested the dilutive exit from Europe.
Liberum also issued a buy note:
The results show that the company’s performance is stabilizing and a lack of negative news should be taken positively by the market. We rate Tate a buy and see 2016 as an inflection point.
The reorganisation of its Eaststarch business in Europe, expected to complete in the third quarter of 2016, will impact profits during that year.
