The food processing firmfaces challenges, but the shares are a long-term buy, says Phil Oakley.
The business
Tate & Lyle makes its money by taking corn and sugar and turning them into value-added products. Around three-quarters of all its sales go to the makers of food and drink products. These include stabilisers, thickeners and emulsifiers.
A lot of the company's focus is on selling speciality ingredients, from which it can make good profits. These include the Splenda brand of sucralose sweeteners, fructose crystals, starches and dietary fibres. Tate & Lyle also sells corn-based starches to paper and cardboard companies, ethanol and bio-products that go into textiles and plastics.
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A small part of the business makes cosmetics, while sucralose is sold to drug companies to make medicines and oral-care products sweeter. Byproducts such as corn feed and gluten meal are sold to animal-feed companies and help reduce the cost of its raw materials. It also supplies bulk commoditised products, such as corn syrup, dextrose and glucose. Last year the group had sales of £3.2bn.
The history
The company can trace its roots back to 1859, when Henry Tate, a Liverpool grocer, went into business with John Wright, a sugar refiner. Together they built sugar refineries in Liverpool and London during the 1870s.
Meanwhile, in 1865, Abram Lyle, a Glasgow-based cooper and shipowner invested in the Glebe sugar refinery. During the 1880s he built his own refinery and started to make Lyle's golden syrup, which is now Britain's oldest brand.
In 1921, Henry Tate & Sons merged with Abram Lyle & Sons to form Tate & Lyle. Significant dates in the company's history include the purchase of United Molasses in 1963 and the discovery of sucralose a calorie-free sweetener made from sugar in 1976.
Tate & Lyle's recent history has been mixed. For years its profits made little progress and moved around in tandem with world sugar prices. The firm spent too much money and had to write down the value of some of its investments.
In 2010, it got out of the sugar and molasses business and began to focus on more profitable speciality food ingredients. As a result, profits have been on an upward trend.
The chief executive
Javed Ahmed has been chief executive since 2009. He started his career at consumer-goods giant Procter & Gamble and spent 17 years at Reckitt Benckiser, where he held a number of prominent roles. He inherited a troubled company at Tate & Lyle, but seems to be doing a good job of sorting it out. He was paid £1.8m for his efforts last year.
Should you buy the shares?
Tate & Lyle is a better business than it was a few years ago. High sugar prices have made its corn sweeteners more attractive and boosted profits. The decision to move away from commoditised sugar markets and focus more on value-added ingredients looks to have been a good one. It is also investing a lot in researching new products to keep the momentum going in this area.
Whether Tate & Lyle is successful or not will depend largely on competition. Its position in the sucralose market is not as secure as it once was. That said, it seems that new sweetener products made from Stevia leaves, Monk fruit extract and Soda-lo a new salt-reducing technology have lots of potential. High corn prices are a concern (Tate & Lyle may not be able to pass all cost increases on to customers), as is a weakening European economy.
Over the longer term, though, the trends towards healthier eating, particularly in convenience foods, should help the company. It also has the potential to sell more of its products in Latin America and Asia. Given that Tate & Lyle's shares are hardly trading on a racy profit multiple, its balance sheet is in good shape and it makes very good returns on its assets, we think the shares are quite attractive. For a patient investor, a long-term investment in the shares could pay off.
The numbers
Stockmarket code: TATE
Share price: 685p
Market cap: £3.2bn
Net assets (March 2012): £1bn
Net debt (March 2012): £476m
P/e (current year estimate): 12.1 times
Yield (prospective): 3.8%
What the analysts say
Buy: 7
Hold: 7
Sell: 2
Average price target695p
Directors' shareholdings
J Ahmed (CEO): 1,041,279
P Gershon (chairman): 69,499
T Lodge (FD): 53,070
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