Broker snap: Jefferies cuts Tate & Lyle target on sucralose pricing



LONDON (ShareCast) - Jefferies has cut its target price for Tate & Lyle (LSE: TATE.L - news) from 980p to 900p after a mixed second-quarter trading update from the sweeteners and ingredients firm on Friday.

Group trading was said to be "broadly in line" with management expectations in the three months to September 30th, although adjusted operating profits would be down year-on-year to due softness in the US beverage sector.

This was "due to the poor spring/summer weather where Q2 volumes remained subdued after a weak Q1," explained Jefferies.

The broker continued: "Management reiterated the full-year outlook for 'another profitable year of growth' but the recent foreign exchange moves and a less favourable sucralose pricing environment are likely to drive low-single-digit consensus [earnings] downgrades, in our opinion."

It also said that the market will likely focus on the comments surrounding sucralose with pricing likely to be negative in the mid-single-digit range for the full year, compared with the low-single-digit range previously indicated, as Tate & Lyle responds to a more aggressive pricing strategy from generics.

Nevertheless, the broker remained upbeat, saying: "T&L's reaction is consistent with its message that the longevity of its improved-pricing strategy in sucralose would remain contingent on the competitive response. We believe T&L's superior scale, cost advantage and high/reliable product quality should see it continue to grow sucralose volumes in the high-single-digit range. Operating leverage from the McIntosh plant should also offer some margin support."

Jefferies maintained its 'buy' rating on the stock but said it expects to lower its earnings estimates through to 2016 by an average 4% due to the recent strengthening of the pound and on lower sucralose pricing.

The share price was up 1.69% at 751.5p by mid-morning on Friday.