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Jefferies downgrades Tate & Lyle following strong share performance as NAFTA issues loom

Analysts said potential fallout from the US/Canada spat and potential NAFTA renegotiation weighed on its estimates in addition to a return to normality following a share price surge
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Despite the downgrade, analysts upped the group's target price to 700p from 665p

US broker Jefferies has downgraded Tate & Lyle PLC (LON:TATE) to ‘Hold’ from ‘Buy’ as its valuation returned to normal ranges following a strong share price performance as well as concerns around NAFTA.

Analysts at the broker said the FTSE 250 ingredients business had seen fresh impetus and strategic clarity from its full-year results in May, but added that a guide of lower profits from Tate & Lyle’s peer Ingredion Inc. (NYSE:INGR) for the current year struck a cautionary note that led to a downgrade of its forecasts.

READ: Tate & Lyle downgraded by Kepler Cheuvreux as it questions ability to beat ‘peak’ 2017/18

Jefferies was also concerned about the future of the North American Free Trade Agreement (NAFTA) and its potential impact on Tate & Lyle’s bottom line: “The optimism of late April seems to have evaporated as NAFTA becomes collateral damage in a wider trade war and US/Canada spat. There is a possibility that this might open the way for a bilateral agreement with Mexico, in which context we were intrigued by Mexico's decision not to include HFCS [High-fructose Corn Syrup] in its recent retaliatory tariffs. But the US$: peso continues to discount gloom.”

Despite the downgrade, analysts upped the group's target price to 700p from 665p, but also highlighted the firm’s outperformance against Ingredion as a key reason behind the downgrade, saying that the outperformance in the shares had taken it to parity with Ingredion and thus “evaporated” a key plank of its Buy thesis.

Jefferies said: “New CEO Hampton had made his mark with fresh clarity on strategy and decisive action on costs. This has been well-rewarded by the share price and a return to PER [price-earnings ratio] parity with INGR. Experience suggests that, when valuation returns to a more normal range, near-term earnings anxiety tends to prevail over longer-term re-rating aspiration. With FY19 guidance stretching, and a modestly below-consensus view, we return to the sidelines.”

Since its full-year results were released in May, Tate & Lyle has seen its share price rise around 10%, from around 609p on May 23 to 670p at last close on June 12.

In mid-morning trading Wednesday, Tate & Lyle shares were down 1.1% at 662p.

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