Tate & Lyle has unveiled a long awaited restructuring, but the market does not seem to sweet on the news.
The company plans to dispose of its remaining bulk ingredients business in Europe, including products such as corn syrup which are subject to fluctuating commodity prices, as well as cutting back its struggling Splenda sucralose operations.
It is selling its 50% stake in bulk ingredients plants in Eastern Europe and Turkey to joint venture partner Archer Daniels Midland for around £170m. It will take full ownership of a plant in Slovakia which is more focused on speciality ingredients.
As for sucralose, which has been hit by cheaper competition from Chinese suppliers, it plans to concentrate on customers more concerned with quality than price, and is closing a Singapore factory to consolidate production in Alabama. There was some speculation the business might be sold when Tate originally announced a strategic review.
The moves will leave Tate generating 55% of its profits from speciality ingredients, up from 50% now, and is expected to see the sucralose business reach break even in the current financial year which ends in March 2016. Chief executive Javed Ahmed said:
The realignment strengthens our focus on speciality food ingredients and also our balance sheet.
But the news has seen Tate’s shares slide more than 1% to 645.5p. Analyst Martin Deboo at Jefferies said:
Tate have bought an option on a brighter future in the form of a dilutive exit from Bulk in Europe and half of Sucralose, plus a net cash gain of £100m. We see these as strongly positive steps strategically. For it to be positive for the shares depends on whether they can trade above 18.5 times 2016 earnings. Convincing the market on the medium term growth model therefore remains key. Meanwhile a firm commitment on the dividend provides an underpin.
We expected April to bring news on Sucralose. What we didn’t expect was an announcement of an exit from Bulk in Europe, completing unfinished business outstanding from 2007, when Tate sold most of Western Europe.
The ‘fix, close or sell’ dilemma on Sucralose gets resolved in favour of our preferred option: fix. Henceforward Tate will seek volume only from less price-sensitive customers (e.g., Pharma) and from a lower cost base. Strategic collateral damage from a total exit from intense sweeteners is thus avoided. To deliver this, Singapore will close (to our astonishment the higher cost of the two facilities) and production will be centred on McIntosh, Alabama. According to Tate, profitability can be achieved at likely 2016 prices i.e. the business case doesn’t require more ‘rational’ pricing. We see this as significant.
Heart tells us that all this should be a positive this morning. Head suggests a more demanding vista. New pro-forma earnings per share implies a 2016 PE of 18.5 times at the current share price. This compares to 16.3 times for Tate now. Below speciality food ingredients aristocrats like DSM (19.8 times), Kerry (21.5 times), Givaudan (25.9 times) and Chr. Hansen (35.5 times). But well above the peer that Tate most closely resembles, Ingredion, on a lowly 13.5 times. In Ingredients, high teens PEs imply sustained at or close to double-digit earnings per share growth. So there will need to be plenty of fresh convincing at the preliminary results, due 28 May.
