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Tate & Lyle - agrees to buy Chinese prebiotic fibre business

Tate & Lyle has agreed to buy China-based Quantum Hi-Tech Biological Co.

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Tate & Lyle has agreed to buy China-based Quantum Hi-Tech Biological Co. for a cash consideration of $237m. The company is a leading prebiotic dietary fibre business, with products including galacto-oligosaccharides from milk sugars, which make up about a quarter of the global dietary fibres market.

Tate & Lyle said: ''The acquisition expands Tate & Lyle's ability to provide added-fibre solutions for its customers across a range of categories including dairy, beverages, bakery and nutrition (including infant nutrition), and to meet growing consumer interest in gut health. It also significantly expands Tate & Lyle's presence in China and Asia''.

For the 11 months to 30 November 2021, Quantum generated revenue of $46m and cash profits (EBITDA) of $14m. Tate & Lyle expects the deal to be immediately beneficial for revenue and profits.

The deal is subject to approval from the shareholders of ChemPartner, a public company listed in China, which currently owns Quantum.

Tate & Lyle shares rose 2.9% following the announcement.

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Our view

Golden syrup, sugar and treacle mean Tate & Lyle is a household name. Except Tate & Lyle plc doesn't own any of those brands anymore. Instead, it's focused on ingredients like sweeteners and thickeners as well as some larger bulk commodity businesses.

2021 results showed underlying profit growth of just 1% and operating margins have been stagnant at 11-12% for the best part of a decade. We think Tate & Lyle could be in a position to deliver something sweeter in future.

Last July the group announced plans to sell a controlling stake in its North and South American Primary Products business for £0.9bn. This is easily the least profitable part of the business, with margins of 9.4% compared to 18.3% in Food & Beverage Solutions and 36.8% in Sucralose.

Strip the soon to be disposed of business out of results, and suddenly you have a very different business. Operating profits grew 18% in the first half of the current financial year, with a 14.8% operating margin. Pandemic related rebounds will have helped, but it's still an impressive result.

We're also supportive of this new, streamlined operation because it means Tate & Lyle will be focussing on a more attractive market. As the world becomes more health conscious and refined sugar becomes last decade, the group's sweeteners and alternative speciality ingredients should stand to benefit. That's where the planned acquisition of Quantum comes in. While we're supportive overall, and can't deny the growth opportunity, the deal isn't cheap on a price to earnings basis. Expectations are high and it marks some entry into less familiar territories, which always increases risk.

One thing to keep in mind is rising inflation. Tate & Lyle can offset some of the effects of rising commodity prices. It can renew some major contracts, giving it a level of guaranteed revenue. But if costs soar at a rapid rate, margins may come under pressure.

The sale of Primary Products is expected to complete in Spring 2022. If it does complete management's plan to return £500m as a special dividend, that would be on top of a prospective dividend yield over the next 12 months of 2.5% and a progressive dividend policy going forwards. Remember all dividends are variable and not guaranteed. The remainder will be used to strengthen the balance sheet - leaving the group with minimal net debt.

This should give the group firepower to invest in its remaining businesses. Management are targeting organic revenue growth in the mid-single digits for the five years after completion and operating margin growth of 0.5-1 percentage points a year. Those are ambitious targets. We're mindful that the price to earnings ratio has risen a bit recently, but we still view 16.3 as undemanding if the group can come good on its goals, and rising costs don't upset the apple cart.

Tate & Lyle key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Third quarter trading statement

Overall third quarter trading has been in-line with expectations. Performance in continuing operations - following portfolio changes in March - or 'New Tate & Lyle', has been better than predicted.

The group also said it's renewed customer contracts, which offset the negative effect of rising inflation.

Continuing operations, or 'New Tate & Lyle' is now expected to be stronger than expected for the full year. Volumes rose 6% in Food & Beverage Solutions, with revenue rising 19%, helped by acquisitions and strength in New Products. Sucralose saw volumes up 7% but pricing wasn't as strong so revenue rose just 8%. Overall, continuing operations saw revenue up 18%.

Tate & Lyle's on track to sell its controlling stake in the Primary Products business in North America and Latin America. Tate & Lyle has a 20-year supply agreement in place. These discontinued operations will be known as NewCo, and will make plant-based products for food and industrial markets.

Following the transaction, the group expects to return £500m to shareholders by a special dividend and associated share consolidation.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 31st March 2022