There have been times over the past five years when Tate & Lyle may have tasted distinctly bitter. Profit warnings, a strained balance sheet and a dividend payout that was looking in jeopardy all conspired against the group and took its share price to a low of a little more than 500p.
Nick Hampton, who made quick work of sorting out the mess when he was brought in as finance director four years ago, has not hung about since he was promoted to chief executive in April. Among the measures he has introduced is a $100 million efficiency and savings drive designed to improve performance and growth. His early success was evident in Tate & Lyle’s first-half results yesterday and the shares, up 6½p to 692½p, are showing signs of positive momentum.
Tate & Lyle traces its history back to 1859 as a sugar refiner. Eight years ago it offloaded its loss-making sugar business to American Sugar Refining, which continues to use the original name. Its main products are ingredients including sweeteners, snacks, soups, sauces, dressings and nutritional products.
The product most closely linked with Tate & Lyle in its modern incarnation has been sucralose, a zero-calorie sweetener branded in some markets, including Britain, as Splenda. Once a big earner for Tate & Lyle, sucralose came off patent a decade ago and five years later began to face intense competition as Chinese competitors flooded the market with their cheaper versions.
Tate & Lyle reports sucralose’s trading performance separately to give investors a clear picture of the health of sales. Incidentally, sales of sucralose were up 1 per cent to £77 million over the six months to the end of September. It is high margin but accounts for a modest amount of Tate & Lyle’s total sales of £1.38 billion over the period.
Tate & Lyle’s other two divisions, primary products and food and beverage solutions, provide a much better picture of the health of its business. Primary products consists of sweeteners, starches and commodities — the last one effectively a trading business for animal feeds and oils — and is by some stretch the biggest and most mature part of the operation. Here, sales dipped a fraction but adjusted operating profits were 8 per cent lower, mainly because of much higher material and transportation costs in the US and a £5 million drop in profit in commodities.
Sales and adjusted operating profits at the food and beverage division, which makes the sweetening ingredients in fizzy drinks, both rose. This is the part of the business that Tate & Lyle sees as its growth engine and a 3 per cent increase in sales volumes at the unit in North America was impressive.
The division also notched up a 12 per cent uplift in sales in Asia-Pacific and Latin America, further underscoring the potential for expansion.
The US remains Tate & Lyle’s biggest geographical market and it is being transformed by shoppers’ increasing preference for healthier, niche products and the acquisition by Amazon of the Whole Foods grocery business.
Tate & Lyle argues that it is well placed. It does not supply Whole Foods directly but it provides ingredients for some of the stock the grocer buys. It has also begun to work more closely with the smaller New Age food companies in the market and should be able to pick up additional customers there.
Taken together these results represent a creditable performance by Tate & Lyle, which is starting to demonstrate its potential.
The shares trade on a modest 12 times earnings for a yield of a little above 4 per cent. They should be capable of growth over time.
ADVICE Hold
WHY The chief executive is making it more efficient and positioning for growth
Arrow Global
The buyer and collector of troublesome consumer debts fired off a volley of retorts to critics yesterday, leaving some investors that have been betting on a decline in its share price facing hefty paper losses.
As well as a strong set of figures for the nine months to the end of September, Arrow Global used a capital markets day for investors to tackle questions about the quality of its earnings and the size of its debts.
The company was founded in 2005 by Zach Lewy, a former United Utilities executive, as a specialist buyer of consumer loans, predominantly in the UK. When it listed in 2013 for 205p a share, its debt-collection activity was contracted out to third parties.
It now collects debts itself, except in rare circumstances such as legal disputes, and less than half of its due loan repayments are in the UK, one of five core markets, the others being Portugal, Italy, Benelux and Ireland.
After an initial strong run, Arrow’s shares peaked at 470½p in August last year but have since been on the slide as investors questioned its costs, high debts and exposure to soaring defaults in an economic crisis.
The shares jumped 40p to 239p, a gain of more than 20 per cent yesterday. There are probably several reasons for the gain. First, the core amount collected rose an impressive 18.2 per cent over the nine months to £288.5 million, a healthy run rate for outstanding owings that are on the books at about £1 billion.
Then there is the 25.1 per cent jump to £63.3 million in the money Arrow made from managing third-party portfolios, a safer and higher margin part of its diversification strategy. When Arrow started out, it used its own money to buy loans but now it invests on behalf of others and manages portfolios owned outside the group.
Third, debts. Arrow has brought its leverage down from 4 times adjusted profits to 3.8 times in the most recent three months and is planning to reduce it further to a more sustainable 3 to 3.5 times. Its interest bill is 6.6 times covered by cash.
Even after yesterday’s jump, the shares trade at just 10.5 times historical earnings and offer a yield of 4.7 per cent. They are certainly worth holding.
ADVICE Hold
WHY Company has reassured about its strategy, quality of earnings and leverage
