Tate & Lyle - no nasty surprises for once

Tate & Lyle (TATE.L): What a relief, with an in-line trading update and maintained guidance for once. For the six months to 30^th September, Splenda Sucralose is up, as is, “strongly”, Food Systems, helped by the Gemacom acquisition. Speciality Food Ingredients (SFI) are up year on year, with volume growth being seen in the second quarter. Good sweetener demand is helping Bulk Ingredients (BI), but the one sour note is Commodities, which have been hit by low US ethanol margins. As a result the overall BI result was below last year. For analysts this is a tricky year, with the dilutive Eaststarch j.v. deal impacting forecasts. In FY2017 this dilution was forecast at 3p. The deal has now received regulatory approval and so is being classified as “Discontinued”, leading to an adoption of equity accounting for joint ventures. As part of the deal, Tate should now receive Euro240m cash on completion and SFI will become around 55% (v50%) of operating profit and account for the vast majority of Europe profits.

At the Finals guidance was for flat pro-forma pre-tax profits in FY2016, with a dividend maintained at 28p. Consensus forecasts now, for FY2016, are 34.9p, with 37.7p in FY2017. The shares have recovered form a summer dip below 500p, to trade at 566p for a PE of 16.2x, dropping to 15.0x. The dividend ambition of 28p is a yield of 4.9%, but re-building cover may come before dividend increases. At the Finals, net debt had risen from £353m to £504m, but net debt to EBITDA to net debt was still only 1.3x, against an internal ceiling of 2.0x. Now, I haven’t seen any company comment on what they will do with the Euro240m due soon, but there must be a chance that a chunk can be directed the way of shareholders? At the very least it helps copper bottom the 28p dividend guidance. Back in April, when the shares were 645p I was lukewarm on them. They still have exposure to cyclicality in BI and fail the dividend growth test, but after this update I am now tempted by that yield and robust looking balance sheet. (Neil Cumming^, 8^th October 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower