Tate & Lyle PLC (LON:TATE) has been downgraded to ‘Reduce’ from ‘Buy’ by European broker Kepler Cheuvreux as analysts questioned its ability to beat a “peak-year” performance in 2017/18.
Analysts at Kepler said: “Although we expect the current year to be quite similar EBIT-wise, we see big downside risks to the Sucralose and Commodities businesses (together c.30% EBIT) from 2019/20E onwards. We think the market misunderstands the dynamics there, and we are 10% below consensus EBIT numbers for 2019/20E and 15% for 2020/21E.
READ: Tate & Lyle sees full-year profits rise by nearly a quarter but sales dip slightly
They added: “While Tate & Lyle’s share price responded very positively (+16% in two days) to a combination of: 1) full-year numbers; 2) the announcement of US$100mln in productivity improvements; and 3) 2018/19 3-4% EPS growth guidance, we feel earnings quality disappointed, as the longevity of the strong performance in Sucralose and Commodities is, in our view, (highly) questionable.”
The broker also predicted issues for the FTSE 250 agribusiness’ sucralose arm coming from China: “Multiple big Chinese competitors were out of the market for several months due to the implementation of stricter environmental laws, having had a clear distortive effect on the global supply-demand balance.”
Kepler also cut its target price for the firm to 620p from 630p, saying: “Based on our estimates, investors are already willing to pay for the potential of M&A/buybacks. Given the focus on operational performance in Tate’s remuneration policies, we do not believe a big buyback is likely. On M&A, we have our reservations regarding potential for value creation, given the transaction multiples seen in the sector.”
In its full-year results in May, Tate & Lyle saw its pre-tax profits rise by nearly a quarter, however its sales dipped slightly.
The group also said it would sharpen its focus on its beverages, dairy, and soups, sauces and dressings categories in order to boost profit growth.
The company added that a programme to simplify the business would be aiming to deliver US$100mln of productivity improvements over four years.
In mid-morning trading Tuesday, Tate & Lyle shares were down 2.7% at 660.6p.