Tate & Lyle PLC (LON: TATE)

Tate & Lyle Plc is an FTSE 250 listed food producers company having an international footprint. TATE was founded in 1903 and is headquartered in London, the United Kingdom. It provides solutions and ingredients for food, beverage and industrial markets. TATE has three operating segments: Food & Beverage Solutions, Sucralose and Primary Products. Food & Beverage Solutions represented 34.6% of total sales in FY2021, Sucralose contributed 5.4% of total revenues in FY2021, while Primary Products achieved 60.1% of total sales in FY2021. The Company has expertise in ingredients and solutions related to Industrial products, Primary products, Food & Beverage solutions, Pharmaceutical and Personal care products and Animal feed. TATE currently serves customers in more than 120 countries and has labs, plants and offices in more than 30 countries.

On 29 July 2021, TATE would hold its Annual General Meeting.

Recent trend of dividend payments

 (Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by TATE from FY2016 to FY2020. In FY2021, TATE would pay a total dividend of GBX 30.80 per share, up ~4.1% YoY. The next dividend of FY2021 of GBX 22.00 per share would be paid on 6 August 2021 (final dividend). It had an ex-dividend date of 24 June 2021.

The current dividend yield of TATE at 4.20% is higher than that of food producers at 1.40%.

Growth Prospects

• New programme to support stevia growers in China: TATE initiated a key sustainability initiative in China. It would empower stevia growers in China to reduce their environmental impact and get greater economic benefits.
• New partnership with AGRANA fruit: The Company recently made a new partnership with AGRANA fruit. It would expand TATE’s operations in the Brazilian fruit preparation market.
• The proposed sale of a controlling stake in Primary Products business: TATE announced the agreement to sell a controlling stake in its Primary Products business to KPS Capital Partners, LP. This strategic move would re-position TATE as an international food and beverage solutions business focussed on accelerating growth in specialty markets. The Company could benefit from rising consumer demand for healthier food and drink.
• Accelerating innovation to support customers: The Company is continuously innovating to offer some new experiences to its customers. It has launched new concepts like Tate & Lyle nutrition centre website, prototype pantry and ‘collaborate at home kitchen’ interactive hub to support its customers. Also, there are customer-focused online programmes like Fibre University and Sweetener University. These initiatives could help it maintain customer loyalty and acquire new customers.
• Portfolio expansion: TATE completed two acquisitions in FY2021. It acquired the remaining 85% interest in the global stevia sweetener solutions business of Sweet Green Fields. Furthermore, it acquired an 85% stake in Chaodee Modified Starch Co. These acquisitions broaden TATE’s presence in the Asian market as well as solidify its sweetener and texturant platforms.

Key Risks 

• Failure to grow Food & Beverage Solutions: It would prevent the Company from delivering against the targets. This could also reduce profitability both in the short and long term.
• Lack of synergy in acquisitions: TATE pursued inorganic growth through acquisitions and made two acquisitions in FY2021. If these acquisitions fail to bring the desired synergies, then it would affect the margins of TATE.
• Failure to commercialise new ingredients: New products and continuous innovation is key to satisfy evolving customer needs. Hence, any failure in this regard could lead to loss of customers to the competitors and an impact on margins.
• Increasing health-consciousness of customers: Worldwide, customers are becoming more and more health-conscious. Hence, any failure to promote healthier products could pose reputational risk and loss of customers.
• Increased reliance on online platforms: TATE increased its reliance on online platforms during the Covid-19 crisis. These platforms need to be maintained properly to avoid any fraud or cyber-attacks. Otherwise, there could be a loss of reputation for the Company.
  

Now we will analyse some key fundamental and shareholders statistics of Tate & Lyle PLC.

Financial and Operational Highlights (for the year ended 31 March 2021 as of 27 May 2021)

(Source: LSE Website)

• There was more in-home food consumption by customers during FY2021 due to Covid-19 restrictions and the work-from-home trend. These led to stronger customer demand for ingredients used in packaged and shelf-stable foods for consumption in-home. This stronger demand contributed to a 3% YoY volume increase and 6% YoY revenue growth in FY2021 for Food & Beverage Solutions.
• Due to robust demand but customer mix and pricing pressure, revenue in Sucralose declined 2% YoY in FY2021.
• Improving mix and higher commodities revenue, mitigated by lower volume due to Covid-19 impact, led to revenue in Primary Products down 2% YoY in FY2021.
• Overall, a decline in Sucralose and Primary Products revenue more than offset the revenue growth in Food & Beverage Solutions, with total revenue down ~3% YoY in FY2021.
• However, due to the lower effective tax rate, adjusted diluted EPS was up ~12% YoY in FY2021.
• It led to adjusted free cash flow of £3 million higher and net debt £34 million lower in FY2021.
• In Asia, the presence of the Company and customer offering expanded due to the acquisition of stevia and tapioca businesses.

Financial Ratios (H2 FY2021)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 12 July 2021, at 9:25 AM GMT, TATE’s shares were trading at GBX 771.00, up by 1.15% against the previous day closing price. Stock 52-week High and Low were GBX 821.20 and GBX 587.20, respectively.

On a daily chart, TATE's price is sustaining above 200-day EMA of about GBX 738.30, indicating the possibility of an upward movement. The 200-day SMA of about GBX 719.40 is also sustaining below the stock price. Hence, there could be an uptick in the stock price in the near term.

In the last year, TATE’s stock has delivered a decent positive return of ~17.77%. However, it has underperformed the FTSE All-Share Food Producers index with a return of around 28.14% and the FTSE 250 index with a return of about 49.72%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

TATE delivered a resilient performance in FY2021, with adjusted diluted EPS rising 12% YoY. It made two acquisitions in FY2021 and expanded its presence and customer offering in Asia. The management recognises the good potential for growth for its Primary Products as out-of-home consumption recovers. Furthermore, the management expects another year of growth from Food & Beverage Solutions, which provides further confidence for FY2022. The Company could benefit from its new program to support stevia growers in China, a new partnership with AGRANA fruit, its repositioning as a business focusing on accelerating growth in specialty markets, its accelerating innovation to support customers and portfolio expansion through acquisitions going into FY2022. The management anticipates further productivity benefits as the pandemic situation improves.

The Board is confident that the overall positive momentum would drive further growth opportunities. On the technical chart, the next important support level is at GBX 670.00.

Considering the benefits of the acquisitions, the Company’s resilient performance, its repositioning as an accelerating growth business, its new programmes and partnerships, the decent profitability, liquidity and leverage position of the business, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Tate & Lyle Plc at the current price of GBX 771.00 (as on 12 July 2021 at 9:25 AM GMT), with lower-double digit upside potential based on 16.43x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective buy stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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