In stock market terms, at least, Tate & Lyle’s $1.8 billion acquisition last month of CP Kelco, the ingredients supplier, left a sour taste. The shares tumbled from 716p to 598p, before creeping back over 600p. However, there may be an upside. In the past five years, any dip below 600p has been a profitable “buy” signal. Can it be so again?
Tate has long abandoned its title as the “king of the sugar lumps”. The move away from the old regime was completed in May when it sold (for $350 million in cash) its remaining shares in Primient, the American operator of corn mills and grain elevators. But it still has sucralose, the calorie-free sweetener it invented in 1976.
Today the company concentrates on tickling our sixth sense. Along with the traditional sight, hearing, touch, smell and taste, the consumables industry has added “mouth feel”, the physical sensation of a food or drink, as opposed to its taste. It can be crunchy, chewy, juicy, hard, heavy or many other variations. That comprises one of Tate’s three main divisions, the others being sweetening and fortification. In any particular case, finding the right combination can be worth billions of dollars, as the greater fizziness and density of Coca-Cola over Pepsi has long demonstrated. Manufacturers will pay richly for a compelling formula to transform a drab product.
Tate creates high-value speciality ingredients for healthier and tastier food and drinks. It aims to cut calories, fat and sugar, its old core product, instead adding fibre and protein, claiming that “every day, across the world, millions of people enjoy products containing our ingredients and solutions”. In case that sounds like catering purely for first-world whims, this year the company is also providing three million meals for the hungry. Tate’s targets of drinks, soups, sauces, dressings, baked goods and snacks together are expected to grow at 6 per cent to 7 per cent a year.
Alongside the Primient sale, it announced annual results showing a 2 per cent adjusted revenue decline to £1.6 billion, but earnings before interest, tax and other charges nevertheless were 7 per cent higher at £328 million. Food and beverages accounted for the bulk of that, rising by 8 per cent to £281 million. Pre-Kelco, the group promised it would continue to invest in “innovation and solution-selling, technology and new capacity”.
Nick Hampton, the company’s chief executive, said that rising consumer confidence and restocking should lead to “good volume growth in the 2025 financial year, accelerating as the year progresses”. That is predicted to translate into pre-tax profit growth of 4 per cent to 7 per cent.
Why, then, the post-Kelco share price gloom? After all, the deal will expand Tate’s product range to sweeten, add alluring texture and improve fibre content in foods. But there are strings. The business is being bought from the privately owned JM Huber Corporation, which will have a 16 per cent stake in Tate and two board seats. That tops a swathe of institutions, led by Threadneedle Asset Management with 9.7 per cent.
The continuing Huber presence adds an extra element of uncertainty to the age-old question of how rapidly two similarly sized operations can be bolted together to eliminate overheads and push progress without pursed lips in the boardroom or wider culture clashes. The target is $50 million cost synergies by March 2027, not a huge amount in such a hefty transaction. Critics fear, too, that the $1.15 billion debt and cash portion of the takeover price may strain the Tate balance sheet, particularly as Kelco’s numbers have wobbled lately. It logged $621 million revenue and $106 million pre-tax profit in the 2023 calendar year, a healthy 17 per cent margin. As completion of the deal is not due until near the end of this calendar year, there will be minimal benefit in the Tate accounting year to the end of next March.
Last year’s 55.5p earnings per share gives a 10.8 price-earnings ratio, accompanied by a 3.2 per cent dividend yield, which should translate into a firm platform for the enlarged business to build on. The merger will be Hampton’s biggest challenge. Let’s hope the former Pepsi executive’s familiarity with the American business scene helps him to get over some daunting hurdles.
Advice Buy
Why The present share price should take account of the short-term risks
FirstGroup
When this column predicted last October that FirstGroup “may be the stock market’s ultimate 2024 general election bet”, we could not have known quite how deeply it would become entangled in Labour’s transport plans if, indeed, the party wins power.
The Labour manifesto says it will take railways into public ownership “as contracts with existing operators expire … without costing taxpayers a penny in compensation”. Since 25 per cent of First’s revenue and just over half its operating profit comes from rail, that’s a serious threat. It will mean the loss of Avanti West Coast, Great Western Railway and South Western Railway by October 2026, leaving it with the highly profitable but much smaller Hull Trains and Lumo open-access lines to run alongside its bus business. Sir Keir Starmer says open-access will have a role and First has applied to run more such trains, from London to Sheffield and Rochdale. Analysts at Liberum estimate earnings from the remaining terms of the national rail contracts to be worth 6.7p a share.
If Labour forms the next government, expect commercial rail chiefs to be knocking on the Department for Transport’s door to argue for a continuing role. Graham Sutherland, First’s chief executive, has said that “the UK rail industry works best as a public-private partnership”, pointing to Transport for London’s Elizabeth Line that he is bidding to run. He says there is scope to pick up other bus and rail contracts nationwide and he has not ruled out expanding in Europe if the opportunity arises.
The dividend for 2023 was raised by 45 per cent, giving a 3.1 per cent yield. The shares, recommended here at 144p nine months ago, have had a rocky time since Labour’s plans were unveiled in April, falling from a 187p year’s high to 153p at one stage.
As FirstGroup shares sell at 9.8 times this year’s expected earnings, the present price makes some allowance for the upheaval that rail confiscation would wreak. Nevertheless, a further drop is likely if nationalisation is actually announced. Expect an early update from the annual meeting in three weeks’ time.
Advice Avoid
Why Outlook for the company remains too uncertain
