LONDON (ShareCast) - On Thursday Swiss broker Credit Suisse (NYSE: CRP - news) decided to increase its price target on the shares of Tate&Lyle (T&L) following the impending finish of the annual price negotiations between the corn wet milling industry and its customers (mainly the beverage companies).
The annual high fructose corn syrup (HFCS) negotiations are now largely complete and price rises in the high single digits look about right to cover the higher corn cost. Tolling rates are unchanged, which all in should mean US sweetener profits (and cash margins) unchanged.
Interestingly, the broker points out how a number of the customers who switched to sugar (claiming health grounds) have switched back to HFCS after they failed to gain any market share for the move (e.g. Capri Sun, Hunt's ketchup).
In any case, even with the rally in the shares towards the end of last year, T&L shares continue to trade on under 13 times forward earnings (close to their the long running average), this despite the improvement in the quality of those earnings (the commodity element falling from 60% to 40% of profits).
Ingredient companies have a wide range of multiples, based on the science and market positions they offer - the top end trading at 20-25 times earnings, the commodity end at 10-11 times, Credit Suisse explains.
The investment bank thinks a multiple closer to 14 times is now appropriate for T&L given the improving mix in the business, which equates to a price target of 845p (versus 750p before).
T&L is scheduled to release its next trading update on Friday February 1st.