Sterling’s slide makes life so sweet for our tip Tate & Lyle
FOOD group Tate & Lyle derives about 70 per cent of its profits from the US, so it is a natural beneficiary of the pound’s weakness against the dollar. The firm is explicit on this – every time the dollar strengthens by one cent against sterling, its profits rise by £1.3million.
Not surprising then, that Tate & Lyle shares have risen 12 per cent – from 625p to 701p – since the EU referendum. Midas recommended the shares in December last year at 604p per share so investors have done well.
Reassuringly though, a trading update last week from chief executive Javed Ahmed shows the firm is not simply benefiting from currency turmoil – its underlying business is forging ahead too. Confusingly this does not involve Tate & Lyle sugar or Lyle’s Golden Syrup, which are now owned by an American sugar group. The new Tate & Lyle has two main divisions. Its bulk ingredients arm turns corn into starch, syrup and oil, while its speciality ingredients arm makes products that help food taste better, last longer and even deliver health benefits. Of these, the best known is the sweetener Splenda, which has been hit by intense competition from China. But Ahmed said that Splenda profits in the three months to June 30 were markedly higher than last year, as the firm cut costs by shutting down a factory. Profits from bulk ingredients were also good and prospects have improved.
Speciality food ingredients, excluding Splenda, delivered higher profits too, though the firm admitted that demand was a little weak in North American and Asia. Ahmed has set three goals for Tate & Lyle by 2020: to generate 70 per cent of group profits from speciality ingredients; to derive 30 per cent of speciality sales from Asia and Latin America; and to make $200million (£150million) of sales from new products, many of which have active health benefits, such as lowering cholesterol.
The group is working hard to meet those goals and is paying a decent dividend, so the shares yield about 4 per cent. Most brokers responded positively to the trading statement, expecting profits to rise 17 per cent to £228million for the year to March 2017, with the dividend up a penny at 29p.
Midas verdict: Investors in Tate & Lyle have benefited from the Brexit effect, but the business is also making genuine progress. Existing shareholders should hold. New investors could also consider snapping up a few of these shares for the long term.