Positive First Half for Tate & Lyle

November 13/London/Business Monitor International Ltd. (BMI) -- British ingredients producer Tate & Lyle has posted strong growth in profits for the first half of its fiscal year thanks to stronger margins and higher corn prices. For the six months to September, Tate & Lyle's adjusted operating profits increased by 13% in constant currency terms, with the firm aided by shifting the manufacture of its core sucralose brand to a single plant in low-cost Singapore. However, despite the favorable operating environment, sales for the group were flat on a constant currency basis, indicating that restoring top-line growth momentum may be harder than increasing profitability.

Tate & Lyle has generally been seen by investors as a boring commodity play, which does well when demand for its key commodities such as sugar and starch is booming, but suffers when demand wanes. The firm has made moves to alter this perception -- notably by focusing on value-added ingredients and as part of this process it has also been selling off its sugar refining operations. In July 2010, it agreed to sell a large chunk of its sugar business to American Sugar Refining for 211 million pounds.

Currently, the firm remains highly dependent on the success of high-intensity sweetener sucralose, which it developed in 1989 and has since achieved wide use as both an ingredient and table-top sweetener. However, with the U.S. patent on sucralose now expired, the company is likely to see increasing direct competition as low-cost Chinese imitators enter the market, while it is also likely to face an increasing challenge from all-natural sweeteners derived from the stevia plant, which have recently been approved for use in the U.S. and are likely to be approved for consumption in the EU shortly.

BMI has previously suggested that Tate & Lyle was too small to be a major player in the sugar field and that exiting this sector makes strategic sense. A focus on value-added products should make the firm less exposed to swings in commodity prices and position it for stronger long-term growth. However, this strategy is dependent on the company building up a portfolio of value-added products with high commercial appeal and the development of a successful innovation pipeline -- something that it has struggled to achieve in recent years.

Ideally, Tate & Lyle would use the funds from the sale of its sugar operations to develop innovative ingredient products with high commercial appeal. However, this is a hit-and-miss process and, in recent years, has certainly been more miss than hit. BMI thinks the firm may be better advised to use its strengthened balance sheet to instead focus on bolt-on acquisitions, targeting smaller companies that have developed proven products and using its experience and scale to roll them out across the food and drink industry.  

From the November 15, 2010, Prepared Foods' Daily News
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