Yahoo Finance Tate & Lyle might be an old sweetie, but its new strategy is modern and makes it a must-own
Change is the only constant in the business world. New technology, evolving consumer tastes and economic developments demand that companies continually adapt their products, services and operations over time. Otherwise, they are likely to be left behind by rivals.
Some companies make major changes over a very short period that vastly improve their long-term financial prospects. The FTSE 250’s Tate & Lyle, for example, last year announced a wholesale shift in its growth strategy.
It now focuses on speciality food and beverages in faster-growing markets. They include fortification ingredients that are blended into foods without affecting their taste, ingredients that are designed to thicken food and beverages, and sweeteners that replace sugar in a variety of foods.
Such products are gaining traction among health-conscious consumers who wish to reduce the amount of calories, fat and sugar in their diet.
In addition, the company sold a controlling stake in its plant-based product business, Primient Products, which now provides it with a dividend stream that amounted to $76m in the first half of the year. Over the same period, the “new” Tate & Lyle business generated a 20pc rise in revenue and a 29pc increase in adjusted operating profits compared with the same period of the previous year.
Encouragingly, the company’s renewed focus on innovation was evident in the 19pc rise in revenue it recorded from “new products”. With strong cash flow, it has the financial means to consistently raise research and development spending to further innovate and enhance its product range.
The company’s financial standing also provides scope to grow via acquisition. Already, it has made two major acquisitions this year and said in its half-year results that more could be on the horizon. Its balance sheet could cope with substantially greater debt levels: net debt fell by 55pc to £281m over the past year, so it now has a net-debt-to-equity ratio of just 23pc.
An interest coverage ratio of more than 10 in the first half of the year further highlights its capacity to cope with fast-paced rises in interest rates prompted by rampant inflation.
It is also overcoming the challenges associated with rapidly rising prices in an era when many companies are struggling to maintain margins. In the first half of the year, Tate & Lyle was able not only to pass rising input costs on to its customers but to increase its operating margin by 1.1 percentage points.
In Questor’s view, this is clear evidence of its competitive advantage and bodes well for investors during a period in which above-target inflation may prove more persistent than policymakers currently assume.
Margins should be further enhanced by the company’s productivity programme, which is expected to reduce costs by around $15m in the current year. And, with a wide geographic presence that includes exposure to fast-growing markets such as China, it is well placed to benefit from a likely improvement in the world economy’s growth rate over the coming years. It generated double-digit organic revenue growth across all regions in the first half of the year.
Of course, its short-term share price prospects could be weighed down by weak investor sentiment and an uncertain global economic outlook. However, in Questor’s view the stock’s 9pc decline since the start of the year fully accounts for this, as well as for the period of major internal disruption that has taken place over recent months.
Certainly, Tate & Lyle’s valuation remains relatively high at a time when many FTSE 250 shares trade at rock-bottom prices. But with a sound strategy, a solid financial position and a sustainable competitive advantage, its forecast price-to-earnings ratio of around 15 suggests it offers good value for money.
Questor says: buy
Ticker: TATE
Share price at close: 725.2p
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