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Press headlines & tips: Tate & Lyle, Cairn Energy, Severn Trent

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January 23, 2013

The name of Tate & Lyle ought perhaps to be changed, argues The Times' Tempus on Wednesday morning. This is because with each passing day traditional sugar is less and less what it does. Thus, about 55 per cent of profits now come from Specialty Food Ingredients (SFI), mainly sweeteners and starches, that go into processed foods. The rest is from processing corn into fructose for soft drinks and so on. Furthermore, with the ever increasing diabetes epidemic demand is set to keep growing quickly. As well, margins in SFI are running at about 23 per cent versus about 8 per cent for corn processing.

No less relevant, a doubling in the number of products, from 28 in 2010 to 59 last year, means that the business can increase its market share. In addition, the number of customers can rise, with supply to those farther down the food chain and not only the food behemoths. Tate & Lyle has indicated that it can grow SFI sales by 4 per cent to 5 per cent. Yet some analysts think this should be easily outpaced, Tempus adds. For 2014 they sell on a reasonable 13-plus times' earnings. "Tate & Lyle will produce another positive trading update at the end of next week. One for the longer term," Tempus concludes (Last IC rating: Hold, 16 Jan).

Cairn Energy is known for one spectacular piece of good luck - buying licences in Rajasthan, India, that turned out to be worth billions - and one relative failure, the decision to invest $1.2bn of that off Greenland. The oil explorer is trying to reduce risk, using its cash pile to buy assets that will produce in the near term and provide cash-flow to fund its blue-sky projects. The market doesn't appear to have bought into this yet. This is a more balanced approach. Existing investors should certainly stay in. "I suspect that the market will start to appreciate it as the year progresses if there is some rare good news on the exploration front," Tempus writes (Last IC rating: Sell, 28 Aug).

Ofwat has rowed back on the more Draconian proposals for its Section 13 licence change, so the situation is much brighter for water companies. So, have the regulatory falls presented a buying opportunity in Severn Trent? The Telegraph's Questor team is not convinced for two main reasons. The first is the fact that water companies’ shares tend to outperform at the start of a regulatory period before underperforming towards the end, as investors get concerned about any potential changes. The next pricing review is in 2014.

Secondly, we have the fact that investors appear to be willing to take on more risk. This has led to a re-rating of shares in riskier sectors such as mining and relative weakness in defensive plays. This trend could continue. The company is, however, valued at about 10 per cent more than its regulatory asset base. This seems fair. The shares are trading on a 2013 earnings multiple of 17.2 falling to 16.4 and yielding a prospective 4.7 per cent, rising to 5 per cent. Hence, the yield should limit any downside, "but the shares could weaken further on sector rotation." For all of the above reasons Questor says hold (Last IC rating: Hold, 27 Nov).

 

Business press headlines:

Barclays is planning to offshore hundreds of roles at its troubled investment banking unit to India in a bid to cut costs, The Independent has learnt. The bank is understood to have dispatched a team to recruit and train new staff there to replace workers in both London and New York. Separately, the bank announced consultations with UK staff at the investment bank over what could be substantial job losses as a result of new chief executive Antony Jenkins' 'Transform' programme. They are designed, said the bank, to 'optimise the business'. [The Independent]

Aerospace firm Rolls-Royce is to cut almost 400 jobs at its Ansty site near Coventry, in a blow to the local workforce, a union has claimed. The company is consulting on staff reductions in its defence workforce at the Midlands plant, with Unite the union claiming 378 "highly skilled" jobs are at risk. Unite has further claimed Rolls-Royce is proposing to shut the plant in the next few years, but has put the blame for the company's decision on the Government for what it called "short-sighted" cuts to the national defence budget. [The Telegraph]

A former member of the Bank of England's Monetary Policy Committee has launched a ferocious attack on the Bank's culture and the autocratic nature of the Governor. Adam Posen claimed yesterday that the Court - the directors - of the Bank of England was "excessively weak" and allowed Sir Mervyn King to get away with whatever he wants. In an explosive appearance in front of the Treasury Select Committee, Dr Posen accused the Bank's supervisory panel of having effectively "abdicated responsibility" and said that there was a "very strong culture and precedent" that if the Governor and other executives made a decision, there "was no point in challenging them". He also accused the Treasury of being "unwilling to take on the Governor in an internal or public fight". [The Times]

A record 202 million people could be unemployed across the world in 2013, the International Labour Organization (ILO) said on Tuesday. Five years on from the onset of the financial crisis, unemployment is on the rise again as economies around the world lose jobs and the fragile recovery is threatened by "incoherent monetary policy" in the US and Europe, said the ILO. According to United Nation's agency's latest report, Global EmploymentTrends 2013, 6 per cent of the world's workforce were without a job in 2012. The number of jobless people around the world rose by 4m in 2012 to 197m. Young people were the worst affected: nearly 13 per cent of those under 24 were unemployed. Some 35 per cent of all young unemployed people have been out of work for six months or longer in advanced economies, up from 28.5 per cent in 2007. [The Guardian]

David Cameron will on Wednesday vow to settle Britain's future in the European Union with a straight in-out referendum by 2017, in a high-risk strategy which will test the willingness of Paris and Berlin to cut the UK a better membership deal. The prime minister will tell the rest of the EU that Britain could "drift towards the exit" unless he is able to win an improved deal, and will lay down a tight timetable for a renegotiation. In a long-awaited speech on Europe, Mr Cameron will say: "It is time for the British people to have their say. It is time to settle this European question in British politics." [Financial Times]

Google cheered investors with news of better than expected earnings last night, with the Californian search giant reporting signs of stability in its advertising rates. The firm said the average that advertisers pay every time users click their ads had declined by 6 per cent in the fourth quarter of last year - a marked improvement from the 15 per cent decline recorded in the previous quarter. Rates have been easing for five consecutive quarters, as advertisers show an unwillingness to pay up to promote their business on mobile devices such as smartphones. But the improvement was welcomed by investors, who sent Google shares higher in extended trading hours last night. [The Independent]

Ikea's chief executive hit out at European governments for holding back thousands of jobs and billions of euros in investment through cumbersome planning laws and red tape. Mikael Ohlsson, head of the world's largest furniture retailer, told the Financial Times that the Swedish group was unlikely to double the pace of its store openings as quickly as it would have liked. [Financial Times]