US Edition Tate & Lyle
314¼p -¾p
Questor says BUY
Tate & Lyle has had a turbulent time over the last six months. The company has issue profit warnings and lost a patent case in the US. The share price has underperformed significantly.
However, Questor feels the shares have been oversold. Questor is no longer as concerned about a slump in the share price – and recommends investors buy them for their chunky 7.5 pc yield, after the share price appears to have turned a corner.
The group is going to have a new management team soon – and Questor welcomes this move.
The current chairman-elect is Sir Peter Gershon, having joined the board in February this year as an independent director. He has experience in cost-cutting, having run a major overhaul of government procurement practices. Sir Peter should take over from Sir David Lees, the current chairman, by the end of the year.
The new chief executive will be Javed Ahmed, an executive at Reckitt Benckiser. Mr Ahmed, executive vice-president of European operations at the consumer products group, will take over in November. He has an MBA from Stanford University and started his career at Procter & Gamble. His CV looks good, but Tate & Lyle is a different type of business than he is used to.
The new chief financial officer will be Tim Lodge, previously the group's director of investor relations. Mr Lodge has 20 years' service at the sugar giant under his belt – both in the UK and abroad. Questor likes the fact that the new finance chief has
an understanding of what investors want from the company – and he should know the business well.
The new team will have to reverse three years of falling profits. The company has been hit by a series of debt downgrades and was demoted from the FTSE 100 earlier this year. It also recently lost a legal battle claiming that the Chinese product sucralose was infringing the patent on its high-margin sweetener Splenda.
The company's recent full-year results were in line with consensus expectations, but profits still
fell. In the 12-month period to March 31, pre-tax profits fell to £113m from £182m and earnings per share dropped to 19.4p.
There was, however, good news on the dividend. The company raised its 2008 payout to 22.9p from 22.6p. The main question regarding the dividend is what will the new management team do? Will it be cut?
The new finance director has had to deal with unhappy investors and he knows what they want, so Questor does not expect a major cut, but there is the possibility it will be trimmed.
However, even if the dividend is reduced, the yield is high enough for this risk to be taken. The company is certainly cash generative enough to be able to maintain the payout, which was covered by earnings last year of 1.7 times.
Net debt at March 31 was £1.2bn, an 8pc increase due to currency effects. However, the company has a good debt maturity profile and the proportion of debt in dollars is roughly similar to the proportion of revenues it generates in dollars as well – so this should act as a natural hedge.
One of the company's two Splenda plants has been mothballed indefinitely, in addition to the previously-announced mothballing of the company's new Fort Dodge corn wet mill.
The shares are trading on a March 2010 multiple of 8.4 times and yielding 7.5pc. An investment in Tate is a long-term recovery play and should be bought for their dividend.
Questor changes the stance on Tate & Lyle shares to buy from sell.
BP
524¼ -8¾p
Questor says BUY
At this week's BP statistical review, chief executive Tony Hayward said that global oil demand dropped for the first time in 15 years in 2008. He also said that he thought oil demand in the West had peaked last year, but this would be more than made up for in the future by demand from emerging economies in Asia.
Questor agrees with this view. One thing that the energy price spike taught businesses is that energy efficiency is important, especially while we are still in the midst of a banking and economic crisis. There are also targets for renewable fuels in all major economies. However, the oil industry still has a bright future.
The oil price has outperformed recently and has now crossed the $71 a barrel level. This should make BP more comfortable with its cash flow, although demand is still likely to be tight this year.
Significantly, Mr Hayward said that he though last year's oil-price spike was not caused by speculators, but rising demand and falling supply after a period of under-investment by the industry.
The company recently said it was closing its final salary pension scheme to new employees from next year. This is with one eye on costs in the future and Questor thinks it is probably a sensible move.
It also implies that Mr Hayward is seriously looking at cutting costs for the business. Peter Voser, Shell's incoming chief executive, is also looking to aggressively cut costs.
This is good news for investors who are relying on dividends, as BP and Shell combined account for one quarter of the payouts in the FTSE 100.
BP shares are 8pc higher than when recommended and trading on a 2009 earnings multiple of 13.2 times. The yield is 6.4pc. Buy.