Wednesday tips round-up: Tate&Lyle, Cairn Energy, Severn Trent



LONDON (ShareCast) - The name of Tate&Lyle ought perhaps to be changed, argues The Times's Tempus on Wednesday morning. This is because with each passing day traditional sugar is less and less what it does. Thus, about 55% of profits now come from Specialty Food Ingredients (SFI), mainly sweeteners and starches, that go into processed foods. The rest is from processing corn into fructose for soft drinks and so on. Furthermore, with the ever increasing diabetes epidemic demand is set to keep growing quickly. As well, margins in SFI are running at about 23% versus about 8% for corn processing.

No less relevant, a doubling in the number of products, from 28 in 2010 to 59 last year, means that the business can increase its market share. In addition, the number of customers can rise, with supply to those farther down the food chain and not only the food behemoths. Tate & Lyle (LSE: TATE.L - news) has indicated that it can grow SFI sales by 4% to 5%. Yet some analysts think this should be easily outpaced, Tempus adds. For 2014 they sell on a reasonable 13-plus times' earnings. "Tate & Lyle will produce another positive trading update at the end of next week. One for the longer term," Tempus concludes.

Cairn Energy (LSE: CNE.L - news) is known for one spectacular piece of good luck — buying licences in Rajasthan, India, that turned out to be worth billions — and one relative failure, the decision to invest $1.2bn of that off Greenland. The oil explorer is trying to reduce risk, using its cash pile to buy assets that will produce in the near term and provide cash-flow to fund its blue-sky projects. The market doesn't appear to have bought into this yet. This is a more balanced approach. Existing investors should certainly stay in. "I suspect that the market will start to appreciate it as the year progresses if there is some rare good news on the exploration front," Tempus writes.

Ofwat has rowed back on the more Draconian proposals for its Section 13 licence change, so the situation is much brighter for water companies. So, have the regulatory falls presented a buying opportunity in Severn Trent (LSE: SVT.L - news) ? The Telegraph's Questor team is not convinced for two main reasons. The first is the fact that water companies' shares tend to outperform at the start of a regulatory period before underperforming towards the end, as investors get concerned about any potential changes. The next pricing review is in 2014.

Secondly, we have the fact that investors appear to be willing to take on more risk. This has led to a re-rating of shares in riskier sectors such as mining and relative weakness in defensive plays. This trend could continue. The company is, however, valued at about 10% more than its regulatory asset base. This seems fair. The shares are trading on a 2013 earnings multiple of 17.2 falling to 16.4 and yielding a prospective 4.7%, rising to 5%. Hence, the yield should limit any downside, "but the shares could weaken further on sector rotation." For all of the above reasons Questor says hold.

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