Tate & Lyle channels cash from JV sale into buyback

Tate & Lyle (TATE) recorded a handsome increase in annual profits despite a fall in volumes hurting revenue, as the food ingredients manufacturer confirmed an operational streamlining via the sale of its remaining stake in its Primient joint venture. 

The almost 50 per cent surge in statutory pre-tax profit was underpinned by a £25mn profit from Primient, the primary products business in North America and Latin America, and lower finance costs. 

The company's sale of its 49.7 per cent position in Primient to KPS Capital Partners is expected to complete in July. This will bring in net cash proceeds of around £215mn, which management wants to return to shareholders through a buyback. The deal values Tate's stake at 6.5 times EV/Ebitda (enterprise value against cash profits), a premium to the 5.1 times valuation of the controlling holding it sold in 2022. 

Annual revenue was impacted by weaker demand as some chunky volume declines were reported. Sales at the key food and beverage solutions (FBS) unit were down 2 per cent due to a 6 per cent volume drop and customer destocking headwinds. The smaller sucralose and primary products Europe arms recorded revenue falls of 1 per cent and 12 per cent, with volumes contracting by a painful 15 per cent at the latter. 

Looking ahead, management expects volume growth this year, but top-line pain looks set to continue. Guidance is for revenue to come in "slightly lower" in 2025, with a cash profit growth forecast of 4-7 per cent. Set against annual targets of revenue growth of 4-6 per cent and cash profit growth of 7-9 per cent, this isn't mindblowing. Another target is for organic return on capital employed to improve by up to 50 basis points on average per annum – growth was 40 basis points in the year.

On an adjusted basis, cash profits rose 7 per cent to £328mn, with the margin climbing 170 basis points to 19.9 per cent. Free cash flow was up £49mn to £170mn, helped by much-improved cash conversion. The balance sheet remains resilient and supports the buyback plan, with net debt at 0.5 times cash profits.  

The shares are rated at 12 times forward consensus earnings, which isn't expensive when compared with the historic average and the valuations of peers. But while the Primient move will aid the long-term strategy, the company is still facing some strong headwinds, which is highlighted by the revenue outlook. Hold. 

Last IC view: Hold, 659p, 9 Nov 2023