Tate & Lyle results will sweeten up your portfolio
The revolution in the food industry over the last three decades has been utterly spectacular. Companies that were once associated with primary products, or a range of linked products, have been suddenly transformed into global players in what's called the food ingredients business. There seems no limit to the scope of these giants, once science and technology begins to hold sway. At home the best example we have seen has been the transformation of the Kerry Group, from a small regional processor of milk into a world force in food ingredients.
Another is the company we are analysing today, the one-time UK sugar specialist, Tate & Lyle (Tate). It's necessary to have been keeping up with corporate fashion trends to be aware that Tate has been completely out of the sugar-refining business for the past four years, even if it hasn't lost its sweet tooth. It still makes lots of money from its high intensity sweetener, Splenda. This product of course is only one of a suite of ingredients which Tate's 30 operations worldwide sell to the multinational food and drinks producers.
The Tate of Tate & Lyle was in the sugar-refining business since 1869. (The founder Henry Tate provided the cash to establish the Tate gallery in London).
The link with Lyle did not happen till 1921. Following the merger the company controlled half of the UK sugar market.
The launch of Splenda in the 1990's set the giant operation off in the general direction in which it is now travelling. Out went its European starch business, and in 2010 it exited the sugar refining business. Today Tate is a strong international company based on ingredients. Their customers focuses on calories, weight loss and healthier products with Tate meeting these demands by making full use of the science and technology behind modern food ingredients. The company's raw materials come mainly from corn crops, adding taste and texture to products like soups, sauces and fizzy drinks used by millions of people every day.
Tate has two worldwide divisions; specialty food ingredients (SFI) and bulk ingredients. The SFI division provides over half of the group's profits with less than a third of its turnover and developing markets accounting for 20pc of its sales. SFI has three broad product categories; starch based, high intensity sweeteners and food systems. Starch based ingredients are used mainly in convenience foods and is particularly strong in Asia. Tate is the largest manufacturer in the world of high intensity sweeteners, like Splenda which has a sweetening power 600 times that of sugar. Discovered in the University of London and produced in Singapore, the product is important to the food, beverage and pharma industries, and contributes one-fifth to SFI revenue. Finally food systems are a blending business with sales of £190m.
Tate's bulk ingredients division sells to multinational food and drink companies, paper producers, textile manufactures and fuel suppliers. It has a wide range of products including corn syrup, dextrose, glucose, industrial starches and ethanol. A by-product of the production process is animal feeds; nothing gets wasted. In spite of problems posed by the weather, harvest yields and volatile sugar prices, the division managed sales of £2.3bn last year and operating profits of £182m.
Last year Tate had sales of £3.3bn and operating profits of £336m. The company has a strong balance sheet, undemanding price-earnings-ratio of 12 and an attractive dividend yield of 4pc. Its profit warning earlier in the year sent the shares tumbling to 662p down from a yearly high of 813p; they have not improved.
The unexpected shut down of its Splenda plant in Singapore and a Chinese sweetener price-war didn't help. On the positive side Tate is using its expertise to shift away from price sensitive bulk commodities, is optimistic that its full year results will recover and its earnings per share will improve. Don't expect a stellar performance but Tate might sweeten your portfolio in the longer term.