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Tate & Lyle - higher prices drive revenue growth

Tate and Lyle's revenue rose 16% in the third quarter, ignoring the effect of exchange rates.

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Tate & Lyle's revenue rose 16% in the third quarter, ignoring the effect of exchange rates.

Performance was driven by 19% growth in Food & Beverage Solutions, which benefited from higher prices and acquisitions. The Sucralose division saw an expected sales decline of 8%, as orders pushed through the first half of the year unwound.

Operational challenges seen over the first half at the Primient joint venture are being "addressed", whilst margins are improving following a round of price hikes.

The full-year outlook remains unchanged, with revenue growth expected in line with current levels. Input cost inflation is expected to be offset through several measures, with underlying profit before tax in line with current market expectations.

The shares were up 5.2% in early trading.

View the latest Tate & Lyle share price and how to deal

Our view

Tate & Lyle's shift, from golden syrup and treacle to sweeteners and thickeners, looks to be yielding some strong results. Third quarter trading continued the trends we saw over the first half. Sales are on the up and higher costs are being navigated with price actions and cost savings.

The group's making good on its promise to streamline operations and focus on the most profitable parts of the business. The margin benefits are already being seen, an underlying operating margin of 16.2% over the first half was a step up from the 14.3% seen this time last year.

We'd expect that to taper over the second half though, as has been the trend with margins historically.

There are some challenges, Tate's heavy reliance on corn to make its products, and given that's a key export for Ukraine, means pricing uncertainty will be a risk moving forward. Cost saving efforts should help with this. The group's delivered more than expected through an efficiency programme that's years ahead of schedule. A further £15m in savings is expected this year.

But passing these costs on to customers will be the most effective way to mitigate inflation. So far, the group's been able to do this, and is making provisions to continue doing so if prices rise further. Its focus on cleaner, healthier ingredients - a market that's gaining momentum - should help support demand despite charging higher prices.

The focus on a growing market is a positive step in our view. Acquisitions are a key part of this plan. The purchase of Quantum, a Chinese daily fibre maker, is an example of this. While we're supportive overall, and can't deny the growth opportunity, execution risk hangs heady in a Chinese market that's seeing prolonged uncertainty.

The sale of Primary Products, now in the form of a joint venture called Primient, was part of the solutions led revamp. Retaining a large stake means Tate still has interests here and following a tricky first half the new venture looks to be making progress. This'll be a key driver of cash flow moving forward, as dividends from Primient get passed on to Tate.

At first glance, the new strategy looks to be progressing well. If management can navigate the increasingly challenging environment, Tate looks to be in a strong position. The valuation, roughly 13 times expected earnings, isn't too demanding. But it's beyond the long-term average so there's an expectation to deliver and there are no promises.

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.

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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Article history
Published: 26th January 2023