Tate & Lyle - will shareholders be in line for a sweetener?

Which consumer trends will hold fast post-pandemic? It’s a question which will resonate with anyone who trades in primary produce futures, but is also germane to investors in established companies like Tate & Lyle (TATE).

Some clarity is emerging on the subject. An open-source paper from the Multidisciplinary Digital Publishing Institute lends credence to anecdotal accounts on food consumption trends during the pandemic. The paper highlights several themes which could have a bearing on investment decisions: a rediscovery of home cooking; preferential treatment for small, local retailers and online food shopping; a notable decrease in food wastage; and, despite price volatility, a consumer shift in favour of healthier, more sustainable foodstuffs.

The last point helps to explain why Tate & Lyle is examining whether it would be in the best interest of shareholders to separate its Food & Beverage Solutions and Primary Products businesses via the sale of a controlling stake in the latter entity to “a long-term financial partner”. The group has observed “heightened consumer awareness of the importance of a healthier diet and lifestyle”, but whether the separation of the two businesses is the optimal way to drive profitability is open to debate.

Financial results for the year to March 2021 suggest the move could be sensible, with sales for Primary Products (60 per cent of the group total) down 5 per cent. However, the segment’s profits were on the up thanks to a record year of commodities sales – nearly double on the prior year. Good news on the face of it, but profits were driven by an inherently volatile part of the portfolio, and the adjusted operating margin is roughly half that of Food & Beverage Solutions. That implies a certain vulnerability.

If the separation, which has already accounted for £19m in one-off planning costs, was to go ahead, Tate & Lyle’s residual business model would resemble that of a consultancy, with the aim of providing processes and expertise to food and beverage producers to enable them to make processed food healthier through the limitation of saturated fats, e-numbers and, ironically enough, sugar.

Whatever the outcome of the negotiations, the balance sheet remains in decent trim, with reduced net debt at 30 per cent of shareholder funds, while free cashflow edged up 3 per cent to £250m. Consequently, bosses felt able to increase the final dividend by 5.8 per cent to 22p a share.

Looking ahead, management believes that a gradual return to “out-of-home consumption” will enable sweeteners and starches profits (down 13 per cent) to return to growth, though commodities profits will be down appreciably on FY2021. Because of this anticipated shortfall, the company said that “adjusted diluted earnings per share are expected to be lower than the prior year in constant currency”.

The group sold its sugar business (and associated trademarks) a decade ago, but the rationale behind the move to hawk-off its Primary Products arm - a producer of artificial sweeteners and industrial starches – is still far from clear, beyond some corporate jargon about “strategic and capital allocation priorities”.

Given a forward yield of 4 per cent and improving cashflow yield, the shares, trading at 13 times Goldman Sachs’ EPS estimate, might be worth snapping up. But caution on the eventual terms of the separation is also warranted.