Timing has taken the shine off Tate & Lyle’s shift towards the burgeoning speciality ingredients market. That evolution took a giant step forward this year when it offloaded a controlling stake in a more volatile sweeteners and industrial starches business. Double-digit inflation, impending recession and supply chain disruption have cast a shadow over the FTSE 250 constituent’s progress.
The result? Tate & Lyle is still valued at a marked discount to international specialty ingredient rivals such as Corbion and Sensient Technologies. But if Tate can continue to navigate the immediate macroeconomic challenges it could earn a valuation closer to its peers.
The $1.3 billion sale of a majority stake, along with board control, of the North and Latin American primary products business to the private equity fund KPS Capital Partners has accelerated Tate’s push to capitalise on trends such as sugar reduction and fortification of food with fibre. The food and beverage ingredients business now accounts for 89 per cent of revenue and 82 per cent of adjusted profits.
Margins in specialty ingredients are about three times those of primary products, which was also more closely tied to commodity prices. The ambition of Nick Hampton, chief executive, is to grow revenue organically ahead of the broader ingredients market, at a rate in the high single-digits, and improve operating margins by between 50 and 100 basis points a year.
Margins have already started to benefit from the push towards newer products and contracts, where Tate works with food companies to design products rather than merely providing the ingredients. New products now account for 14 per cent of food and beverage revenues, up from less than 10 per cent five years ago. Hampton’s hope is to increase that to 20 per cent by 2026. The adjusted operating margin was 16.2 per cent over the six months to the end of September, compared with 12.4 per cent in 2019.
Inflation is an issue and is expected to worsen during the current six-month period compared with the first half of the year but Tate has managed to offset higher costs through the shift towards more profitable products and price increases. Adjusted operating margins for the core food and beverage business were 60 basis points over the first half of the year.
There are challenges. Between 5 and 10 per cent of revenue is generated in China in any given year, which means zero-Covid policies have hurt both demand and supply chains. Revenue in China has returned to growth as restrictions have become less severe and a further easing may spur a greater recovery, but it still leaves the company vulnerable to Beijing’s policies. Disruption from China, together with one-off issues like industrial action in the Netherlands and the move to exit low-margins businesses, caused sales volumes to decline 5 per cent over the first half of the year. Analysts forecast a return to volume growth next year.
Retaining a 49.7 per cent stake in the primary products business allows Tate to benefit from any growth in earnings that KPS can engineer or even an outright sale. The deal also had £500 million handed back to shareholders and leverage reduced. Net debt is now below annual adjusted profit before interest, taxes and other charges, which leaves plenty of room for more deals in the faster-growth fortification and mouthfeel industries or developing markets.
In June, the company acquired the Chinese dietary fibre business Quantum High-Tech for £184 million, increasing its footprint in Asia as well as the fast-growing dietary fibre market. For the right deal, an increase in the leverage multiple to around three would be permissible.
Tate & Lyle can no longer be classed as an income stock. The dividend was rebased post-primary-products deal and analysts forecast a payment of 18.2p a share, which would represent a yield of 2.5 per cent at the present share price. But investing more of the cash generated by the business into bolt-on deals and growing share in the specialty ingredients should deliver better shareholder returns.
ADVICE Buy
WHY Shifting towards the higher-growth speciality ingredients market could accelerate revenue and margin growth
Ashmore
Central banker ratesetters might have kept up the hawkish talk during last week’s round of meetings, but markets have pared back interest rate expectations as recession looms. Yet any investors betting that easing US bond yields could spur a recovery in Ashmore, an asset manager specialising in emerging markets, might want to think again.
A series of rate increases, together with volatility in the markets, has sent cash flooding out of riskier emerging-market assets. The impact on the FTSE 250 constituent has been severe.
Assets under management had declined to $56 billion by the end of September, down from $91.3 billion at the same point last year.
A bias towards fixed-income strategies, which accounted for 88 per cent of assets at the end of September, means that Ashmore is vulnerable to increased rewards from investing in less-risky developed-market debt.
About 95 per cent of assets are managed on behalf of less panic-prone institutional investors, but that hasn’t insulated Ashmore from heavy net outflows. Clients pulled a net $5 billion in cash over the three months ended September.
That was less severe than outflows of $6.6 billion recorded during the previous quarter but still the second-highest quarter of the past 15 months.
Analysts at Numis do not forecast a return to growth until 2025 and even then the brokerage thinks assets under management will remain $7.5 billion below the level recorded at the end of June, at $56.8 billion.
The shares have fallen by 21 per cent since the start of this year but that does not make them cheap. A series of cuts to profit forecasts by analysts mean they trade at almost 16 times forward earnings, a touch above the long-running average.
A rich cash pile of more than $500 million could keep the dividend of 16.9p intact. At the current price, that would leave the shares offering a dividend yield of 7.3 per cent.
However, that is not enough reason to consider buying the shares, which could be held lower while riskier assets remain out of favour.
ADVICE Avoid
WHY The risk of a further decline in assets could hold the shares back
