Tate & Lyle PLC (LON: TATE) – Building stronger relationships with customers and maintaining financial strength

Tate & Lyle PLC (LON: TATE) is a FTSE 250 listed, British-headquartered Company, which provides solutions and ingredients for beverage, food, and industrial markets. It operates through three major divisions, namely Food & Beverage Solutions, Sucralose and Primary Products, while Primary Products represented nearly 62% of their total sales in FY20. The Group has expertise in solutions and ingredients related to Food & Beverage solutions, Primary products, Industrial products, Animal feed and Pharmaceutical and Personal care products. The Tate & Lyle came into existence in 1921, and currently, the Group serves customers in over 120 countries with more than 4,200 employees. The Group has offices, plants, and labs in more than 30 countries and possesses 18 laboratories. It had processed 1.5 million acres of corn in the United States in 2019.


(Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

The global trends for food companies are challenging, albeit it holds opportunities as well. As per the market analysis, the global specialty food ingredients market is valued at around USD 79.81 billion in 2020, and it is projected to value nearly USD 121.6 billion by 2025, representing the compounded annual growth rate of 6.2% between 2020 to 2025. Meanwhile, the industry is facing increasing raw material cost, and the demand for low sugar food alternatives is putting further pressure. The major drivers for change include rapid population growth, urbanisation and use of technology.

The key factors that will drive the food industry forward are:
 

1. 80% estimated increase in North American meat substitutes market by 2025 to €1.8 billion, from 2018.

2. 26% global greenhouse gas emission from food production.

3. Around 35 cities, states and national government have introduced sugar tax.

4. 30% rise in population by 2050.

5. Growing middle-class population from 2.8 billion in 2015 to 5.3 billion by 2030.

6. 70 million children are projected to be overweight by 2025 globally.

7. Around 114 million diabetic adults were in China in 2017.
 

Growth Prospects and Risk Assessment

TATE has been partnering with customers to create solutions and ingredients for making healthier and tastier products at affordable prices. The Group has been targeting low sugar, low calories and fibre enriched food solutions and ingredients. Moreover, the volume size of the Company was able to offset the industrial cost increase to maintain the profitability in the primary products division. Further, the Company is focused on accretive portfolio development. For example, the Company partnered with Codexis to come up with TASTEVA® M Stevia Sweetener. The Company has been focussing on creating high-quality products and services, which had resulted in a higher level of customer satisfaction. It is well-positioned to take benefits from growth trends across the energy and industrial markets. The Company, through dedicated research and development team, can bring new products and technologies to expand into new industries.


(Source: Presentation, Company Website)

The Group emerges as a global leader in industrial starches, stabilisation, fibres, texturants and sweeteners. The Company has been focussing on creating high-quality products and services, which had resulted in a higher level of customer satisfaction. The Company is well-positioned to take benefits from growth trends across the Consumer Goods markets.The Company, through dedicated research and development team, is providing superior quality products and also bringing new products and technologies which is helping them to expand into new Markets. The Company using cost synergies had optimised operational structure to achieve sustainable growth in the future. The Company has a strong global presence and serving customers from over 120 countries worldwide.

However, there are certain factors which can put the growth prospects or business performance at risk. The fluctuations in the raw materials price and availability of operating inputs could impact the profitability of Tate & Lyle. The failure in cybersecurity and a critical data breach could affect the operations as well as the reputation of the Group. Moreover, the Company might not be able to achieve targeted growth if they fail to develop or commercialise new ingredients. Also, the supply chain is at risk with global disruptive events, such as Covid-19, Brexit, and Trade disputes.

Failing to grow Food & Beverage Solutions would prevent the Group from delivering against the targets. This could also reduce profitability in the short term. The Company needs to develop new products to show the ability to lead the industry, failure to do so will impact the operational performance and also unable to meet the customer needs. Being a food producer, the Group needs to maintain the quality and safety of products, failure to do so will negatively impact the reputation and might led to regulatory risks as well.

Capabilities of Business Divisions

Food & Beverage Solutions: This division produces Texturants, Sweeteners and a portfolio of Health and Wellness products including speciality fibres and stabilisers & functional systems.

Sucralose: It provides a high-intensity sweetener, which is used in various food categories and beverages.

Primary Products: It consists of industrial starches, high-volume sweeteners, and fermentation products (mainly acidulants). It also markets and sells co-products from the corn milling process.

 
(Source: Annual Report, Company Website) 
 

Synopsis of Recent Developments

20 July 2020: The Company launched SWEETENER-VANTAGE™ Expert Systems, to help formulators create sugar-reduced food and drink using low-calorie sweeteners.

29 July 2020: Signed a distribution partnership with Solevo for West Africa including Ivory Coast, Senegal, and Cameroon.

20 April 2020: The Company received approval for the claim against PROMITOR® Soluble Fibre functional from the Anvisa (the Brazilian Health Regulatory Agency).

11 March 2020: The Group introduced CLARIA EVERLAST® (starch that delivers shelf stability). It will strengthen the primary products division.

Top Shareholders Statistics

 
 

Update on Trading Performance for 3 months period to 30 June 2020 (released on 23 July 2020)

In the first quarter of the financial year 2021, the Group’s out-of-home consumption was impacted in Europe and North America due to imposed lockdown and was partially offset by strong in-home consumption. The Company in April and May witnessed fluctuating demand patterns, while in June with the ease in lockdowns the demand improved for both businesses. The impact of the pandemic is still unclear, and the Group has taken measures to ensure the health and safety of employees. The Company is working in sync with customers to support the food supply chain, and all manufacturing facilities are fully operational.


 (Source: Company Website)
 
The Group’s revenue from Food & Beverage Solutions increased by 1% to £232 million, reflecting benefits from mix management and good price, and New Products revenue growth of 9%. The volume declined by 2% due to lower out-of-home consumption, which was offset by stronger demand for shelf-stable foods and packaged foods. The revenue from Sucralose declined by 1% to £39 million, reflecting softer out-of-home consumption. For the primary products, the revenue declined by 9% to £420 million.

TATE has a strong balance sheet with net debt of £384 million on 30 June 2020 and was £67 million lower as compared to net debt on 31 March 2020, reflecting good cash management and seasonal improvement.

Financial Highlights - Good financial Performance for FY2020 (31^st March 2020)


(Source: Annual Report, Company Website)

For the financial year ending 31 March 2020, driven by robust revenue from Food & Beverage Solutions, the revenue increased by 5% to £2,882 million (FY19: £2,755 million), while the revenue increased by 2% on constant currency basis). The adjusted PBT (profit before tax) rose by 4 per cent to £331 million in FY2020, reflecting double-digit profit growth from Food & Beverage Solutions and a slight increase in profit from primary products and sucralose. The statutory profit before tax (PBT) increased by 23% to £296 million in FY2020 (FY19: £240 million), driven by lower exceptional costs. The statutory diluted earnings per share surged by 35% to 52.1 pence in FY2020 (FY2019: 38.6 pence), due to increased earnings and lower exceptional charges. The adjusted free cash flow for the financial year 2020 stood at £247 million, a growth of £35 million against the previous year. The Group witnessed an improvement in return on capital employed by 40 bps at 17.5 per cent in FY2020. Total dividend per share increased by 0.7 per cent to 29.6 pence in FY2020. In March 2020, the Group has taken an effective action to reduce costs, preserve cash and maintain financial strength.

Financial Ratios – Strong Profitability and Liquidity for FY2020 versus Industry Median

Reported profitability metrics in the financial year 2020 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. Tate & Lyle Plc has delivered a substantial return for the shareholders’ as return on equity of 17% was significantly higher as compared to the industry median. On the liquidity front, Tate & LylePlc’s current ratio was higher than the industry median of 1.72, reflecting sufficient current assets to pay short-term obligations, which shows a robust liquidity profile to tackle the uncertainty due to covid-19 outbreak. On leverage front, the debt-equity ratio of the Tate & Lyle Plc’s was 0.52x, which was higher as compared to the industry median of 0.34x, reflecting that the company is more leveraged as compared to the industry.  
 
Measuring Non-Financial Key Performance Indicators


(Source: Annual Report, Company Website)

Share Price Performance Analysis


Daily Chart as on 10 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On August 10, 2020, at the time of writing (before the market close, at 9:40 AM GMT+1), Tate & Lyle Plc shares were trading at GBX 670.00 and remained flat against the previous day closing price. Stock 52 week High and Low were GBX 811.40 and GBX 493.83, respectively.

Bullish Technical Indicators

From the technical standpoint, shares were trading above the short-term support level of 10-day, 20-day and 30-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Tate & Lyle Plc Vs FTSE-Mid 250 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, Tate & Lyle share price has delivered a 22.15% return as compared to a negative 0.38% return of FTSE-Mid 250 index, which shows that the stock has outperformed the index during the last five years.

Valuation Methodology

Price/Earnings Approach (NTM)



To compare Tate & Lyle Plc with peers, Price/Earnings multiple has been used. The peers are Kerry Group Plc (Price/NTM Earnings was 28.02), Diageo Plc (Price/NTM Earnings was 22.01), Glanbia Plc (Price/NTM Earnings was 11.30), Premier Foods Plc (Price/NTM Earnings was 8.69) and British American Tobacco Plc (Price/NTM Earnings was 7.40). The Average of Price/NTM Earnings of the company’s peers was 15.48x (approx.).
 

Business Outlook Scenario

FY20 was another year of consistent delivery as the Company witnessed strong revenue and profit growth. However, the trading at the start of FY21 was mixed with lockdowns in the US and Europe. The Food & Beverage segment kept on performing well; however, the business was impacted by the reduced out-of-home consumption in the US. Given the intensity and prolonged nature of the pandemic, the management could not provide any financial guidance for FY21. However, the Group affirmed that the fundamentals of the Company remain sound despite the challenges of Covid-19. Furthermore, the Company plans to identify additional savings of US$150 million over a six-year period. It has a high-quality portfolio of ingredients to meet the changing trends and rising demand. Combined with financial strength and robust product portfolio, the Company shall be able to navigate the uncertain short-term period successfully, and the long-term prospects appear strong for the Company.


 (Source: Presentation, Company Website)

Initially, in the month of April and May, the Group witnessed fluctuations in the demand patterns due to imposed lockdown. In the month of June, the demand for products improved with the ease in lockdowns. TATE witnessed a strong balance sheet and managed to reduce net debt by £67 million to £384 million on 30 June 2020, which reflect good cash management and seasonal improvement. Furthermore, the Company made good progress in executing the strategy with robust revenue and profit growth from Primary Products and Food & Beverage Solutions. In the light of COVID-19, the Group is taking several actions to preserve cash, reduce costs, and maintain financial strength. Moreover, the surging global demand for healthier food and beverages holds the potential for a bright future.

Over the course of 4 years (FY16 – FY20), the Company’s revenue surged from GBP 2,355.00 million in FY16 to GBP 2,882 million in FY20. Compounded annual growth rate (CAGR) stood at 5.18 per cent.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “BUY” recommendation at the current price of GBX 662.58 (as on 10 August 2020, before the market close at 8:03 AM GMT+1), with lower double-digit upside potential based on 15.48x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).
 
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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