Tate & Lyle drives margins despite rising input costs

• Efficiencies drive free cash flow and conversion rates
• WHO findings are a potential problem in the making

Tate & Lyle (TATE) met all its operating targets during FY2023, while further rejigging the business mix to meet consumer trends. Acquisitions to the tune of £192mn expanded the food ingredients manufacturer’s competencies in areas as diverse as dietary fibre and chickpea protein and flour. Tate & Lyle’s product offering is certainly no longer monolithic in nature.

The group promotes a collaborative approach with its customer base. This has benefits in terms of providing tailored solutions to its clients’ needs, with the added benefit of embedding those commercial arrangements. To this end, a new collaboration centre was opened in Santiago, Chile, while an existing centre in Singapore has been extended.

The operational progress is reflected in the full-year numbers. The Food & Beverage Solutions division was the primary driver of revenues through the period, mirrored by the 29 per cent increase on a statutory basis. The adjusted pro-forma increase drops to 19 per cent – still healthy enough, but financial performance wasn’t helped by materially lower profits from its minority holding in the Primient joint venture. Perhaps the most pleasing sales metric was the 17 per cent increase in new product revenue.

Cash profits were 22 per cent to the good at £320mn, complete with a 60 basis point increase in the underlying margin as the group was able to pass through the burden of rising input costs to customers. The increase would have been welcomed by management given it was achieved despite the supply constraints brought about by the Ukraine conflict and poor weather conditions in major producing areas – both of which persist.

An intensified focus on the cash conversion rate led to a £47mn hike in free cash flow to £119mn. The net debt level stands at a lowly 0.7 times cash profits. Increased efficiencies are also reflected in the 100 basis point increase in the return on capital employed to 17.5 per cent.

The group said that 2024 revenue growth is in line with its five-year target of 4-6 per cent. But potential investors would be well advised to monitor volume trends across the business. The group is making solid operational progress, but, like any other business, externalities can have a negative impact. Recently, the World Health Organization (WHO) revealed that study results showed long-term use of non-sugar sweeteners was related to health issues, such as Type 2 diabetes. It is too early to assess what implications, if any, the findings will have on the business, but it means we adopt a more cautious stance. Hold.

Last IC View: Buy, 727p, 11 Nov 2022