A souring of sentiment towards Tate & Lyle (TATE) is an opportunity for value investors to take a taste of the international business.

Recent earnings downgrades reflect year-to-date dollar weakness and margin pressure amid investment in the business. This has weighed on the equity valuation.

But Tate & Lyle is on the path of a sustained recovery and has a positive catalyst in the promotion of CFO Nick Hampton to CEO, providing the prospect of a renewed strategy to accelerate the £2.62bn cap’s transformation to a speciality ingredients play.

SPLENDID POTENTIAL

Tate’s two divisions are the relatively commoditised Bulk Ingredients unit, selling bulk sweeteners and industrial starches, and Speciality Food Ingredients (SFI), the long-term growth driver, whose products span texturants such as starch and gums, sweeteners, comprising nutritive sweeteners and no-calorie sweeteners including ‘SPLENDA Sucralose’.

Following a testing few years of transformation towards a higher margin, less volatile speciality ingredients supplier, Tate is in a far healthier position operationally.

However, its third quarter update (8 Feb) was harshly punished. Though it reiterated profit guidance for the year to March 2018, management cautioned that investments behind the longer term development of the SFI business ‘will moderate profit growth in the second half’.

TATE’S TOO CHEAP

As Investec Securities explains in its latest note (12 Feb), ‘we appreciate there is a degree of investor fatigue with the multi-year SFI strategy not yet delivering the hoped-for benefits. But, Tate is now VERY cheap and new management may well offer better ideas for value creation.’

The broker reiterates its ‘buy’ rating on valuation grounds and a 735p price target implying 29.5% upside. Significantly, Investec’s 903p sum-of-the-parts valuation is almost 60% higher than the current battered share price.

We think Tate & Lyle is oversold. For the year to March 2018, Investec still forecasts an increase in normalised pre-tax profit to £302.3m (2017: £271m) for earnings of 49.3p and a 28.6p (2017: 28p) dividend, ahead of pre-tax profit of £305m, 49.8p of EPS and a 28.8p shareholder reward for March 2019.

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