Tate & Lyle PLC

Tate & Lyle PLC is an FTSE 250 listed Company, which is the global provider of food and beverage ingredients and solutions.

Investment Rationale for Valuation – BUY at GBX 688.80

• Tate & Lyle has repositioned itself as growth-focused speciality food and beverage solutions business internationally.
• The accelerated demand for healthy drinks due to the Covid-19 pandemic shall increase consumer demand.
• In five-year, the Company expects operating margin expansion of at least 50 to 100 basis points annually.
• The Company will return approximately USD 700 million to shareholders in the form of a special dividend and share consolidation received from the net sale proceeds upon the completion of the disposal of the primary products business.
• The acquisition of stevia and tapioca businesses would consolidate TATE’s presence in Asia.
• From a technical standpoint, TATE is hovering below the lower Bollinger band, while the 14-day RSI (~27.09) is reiterating the oversold position.
• On a forward 12-month basis, valuation metrics – EV/Sales, EV/EBITDA, Price/Earnings, Price/Cash Flow, and Price/Book are quite undervalued against the Consumer Staples sector.

Key Risks

• Increased input prices, freight costs, and supply chain disruption can impact the Company’s growth trajectory.
• The disposal of primary products business might adversely impact the revenue and profitability of TATE.
• The failure to promote health-related products might create reputational damage resulting in loss of customers.
  

Recent News 

On 12 July 2021, TATE had decided to sell a controlling stake in NewCo to KPS Capital Partners. Moreover, the Company expects to receive net cash proceeds of approximately USD 1.20 billion upon the completion of the sale. 

FY21 Financial & Operational Highlights (for the twelve months ended 31 March 2021, as of 27 May 2021)

(Source: Company result) 

• For Food & Beverage Solutions division, the Company had shown decent revenue growth of around 6% at constant currency at £970 million.
• With regards to the balance sheet, TATE had managed to reduce the net debt by £34 million to £417 million during FY21.
• The Return on Capital Employed (ROCE) stood at 17.2% during FY21. 
• TATE had shown a modest 4.1% increase in the total FY21 dividend when compared with the dividends paid in the prior year.

Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion

The new products revenue had shown a robust growth of around 21% in constant currency during FY21, boosted by double-digit growth in texturants and sweeteners platforms. Moreover, the food & beverages solutions division is expected to show accelerated progress during FY22. Furthermore, TATE expects to complete the sale of the controlling stake in NewCo by the first quarter of 2022. Looking ahead, the Company will primarily focus on the global food and beverage solutions business to penetrate rapidly growing speciality markets. The stock made a 52-week high and low of GBX 821.20 and GBX 587.20, respectively.

Based on the financial guidance, dividend growth, bright prospects, and favourable valuation using the above method, we have given a “BUY” recommendation on Tate & Lyle PLC at the current market price of GBX 688.80 (as on 16 September 2021, at 7:30 AM GMT), with lower-double digit upside potential based on 16.38x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Ferrexpo PLC

Ferrexpo PLC (LON: FXPO) is a FTSE 250 Index listed iron ore pellet producer with mines in Ukraine (Poltava region) and sales operations internationally. It has been serving the global steel industry by mining, processing, and selling iron ore for more than 40 years.

FXPO expects to release its Q3 FY21 production results on 6 October 2021.

Investment Rationale – BUY at GBX 334.60

• The investment in high grade pellets delivered a strong financial performance in H1 FY21. The Group also continued progress in reducing carbon emissions.
• The strong financial performance has enabled them to repay its pre-export finance facility earlier, and thus, it ended the half-year in robust net cash position.
• The significant increase in the interim dividend reflected a healthy state of balance sheet and confidence in the outlook.
• As per valuation metrics, EV/Sales, Price/Earnings, Price/Cash Flow, EV/EBITDA, and Price/Book multiples of the Ferrexpo PLC are currently lower as compared to the corresponding multiples of the Basic Materials sector.
• From a technical standpoint, 14-day RSI (~30.27) is in the oversold territory and supporting the upside potential, while the stock price has gone below the lower Bollinger Band.

Risk Assessments

• China’s production slump can impact the iron-ore prices in the short-term.
• FXPO's mining and processing operations are located in Ukraine, which is exposed to geopolitical risks due to the territorial dispute with a neighbouring
• The macro headwinds pertinent to higher commodity prices and increasing freight rates can put pressure on the delivery cost.
• Amidst the Covid-19 scenario, production stoppages and equipment failures can also impact the performance.

Recent News

Appointment of Group Chief Financial Officer: On 07 July 2021, Ferrexpo announced the appointment of Nikolay Kladiev, as Group Chief Financial Officer, effective from 4 August 2021.

Financial Highlights (for the six months ended 30 June 2021, as on 4 August 2021)

 (Source: Company Website)

• Ferrexpo reported strong financial performance in H1 FY21, on the back of investment in the high-grade pellets.
• Therefore, revenue and underlying EBITDA increased by 74% and 147% year-on-year, respectively.
• At the end of H1 FY21, the net cash position stood at US$213 million (31 December 2020: US$4 million).
• Following the strong performance, the Company announced an interim dividend of 39.6 US cents per share (H1 FY20: 13.2 US cents per share).
• The interim dividend was paid on 26 August 2021 to the shareholders at the close of business on 13 August 2021. The ex-dividend date was 12 August 2021.

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion 

Ferrexpo reported robust interim results, underpinned by a multi-year investment programme in its assets, the strength of the iron ore market, and excellent safety performance. Following the strong operational and financial performance, the Group reported a sound net cash position of US$213 million as on 30 June 2021. In addition, despite investing US$93 million in growth capex in the first half, the Group recommended an attractive dividend of 39.6 US cents per share. Overall, the Company is in a great position to generate significant shareholders returns. The stock made a 52-week high and low of GBX 513.00 and GBX 163.80, respectively.

Based on the robust cash generation, resilience balance sheet, increased new business, supported by the valuation conducted above, we have given a “BUY” recommendation on Ferrexpo PLC at the current market price of GBX 334.60 (as on 16 September 2021, at 8:30 AM GMT), with lower double-digit upside potential based on 2.99x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary 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 stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

Disclaimer 

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