Sucralose woes hit Tate

Shares in Tate & Lyle (TATE) soured after the company announced that it expected a substantial deterioration in the price of its sucralose sweetener. That's one of its most important products which previously generated around 15 per cent of group profit.

The price weakness is apparently being driven by a surplus of Chinese generic sucralose stocks, which deflated market prices just as Tate was renewing important contracts. The rate of decline is expected to pick up in the final quarter of this year and management has warned that sucralose prices will be 15 per cent lower next year. The City reacted to the news by cutting earnings forecasts for 2015 by as much as 14 per cent and has pencilled in a small decline in underlying EPS for the current financial year.

Alongside that, Tate reported volume softness in developed markets at its Speciality Food Ingredients unit and lower returns from co-products in the Bulk Ingredients division. So adjusted group pre-tax profit in the third quarter was lower than expected. The good news, though, was that net debt continued to fall, reaching £253m from £336m in September. Sucralose aside, management expects profit growth in all product categories in the Speciality Food Ingredients division for the full year.

Berenberg Bank says...

Buy. Even with a 15 per cent price decrease, sucralose is still a high-margin product. Tate has managed to maintain its pricing premium to the generics because around 70 per cent of customers require its technical assistance or high grade facilities. Concerns over further downside to sucralose pricing looks likely to persist, but the share price reaction was overdone - the chief executive clearly thought so as he bought nearly £670,000-worth of shares. Trading on 11 times 2015's forecast earnings, the shares are extremely undemandingly rated. They also offer a well covered 4 per cent dividend yield, while gearing will fall to under one times equity in 2015. The catalyst for a re-rating is proving illusive, so an acquisition will be key.

Deutsche Bank says...

Buy. Assuming a 20 per cent annual decline in sucralose profits to a level where it no longer matters leads to a 10 per cent cut in our EPS estimate for 2015 to 55.1p, with 54.1p expected in 2014. However, the ex-sucralose speciality ingredients division accounts for 45 per cent of company profit and is growing 10 per cent a year. The bulk business is performing reasonably well, but Tate's forward PE ratio for 2015 of 12 times leaves it rated in line with US bulk peers. Yet all of the profit growth is coming from its diversified ingredients segment, with the reliance on sucralose essentially discounted. Our mid-term modelling looks for 7 per cent EPS growth a year with a 4 per cent yield, which is close to some of the best of the staple companies that we research.