Jefferies downgrades Tate & Lyle on Nafta caution

Tate & Lyle is facing a likely softer sugar pricing climate in 2018 and combined with anticipated slow progress towards ramping up its speciality ingredients profits, Jefferies downgraded its recommendation on the shares to 'hold' from 'buy'.

Jefferies, which trimmed its target price to 800p from 870p, said there remains "plenty of upside if Tate if it can convince" around its Speciality Food Ingredients arm, from where management are aiming to generate of 70% of profits in three years' time.

Shares in the company are up 50% from their 2015 trough and Jefferies said it was moving to the sidelines, after a breathless couple of years and a recovery of a slight premium against NYSE-listed Ingredion as the 'Trump discount' has lifted.

"We wish Tate hadn't nailed their colours to the mast of 70% of profits from SFI by 2020. For us, it's a too-monadic, too-bounded, target that over-simplifies and under-values the attractions of the core Corn Wet Milling assets," analyst Martin Deboo wrote, noting that low growth out of US big food will impose an ongoing constraint.

Furthermore, although the US/Mexico sugar dispute looks to have resolved favorably for now, a big lift in margins looks in store, even though profits in the 2018 financial year still are likely to be below "peak Tate".

But cautious commentary from both Tate & Lyle and Ingredion make the analyst "more wary", with the next pricing round playing out against a background of a NAFTA re-negotiation.

"While we remain sanguine here relative to other voices, that's not the same as being as unequivocally positive as we were. Utilisation is no longer incrementing up and bottlers might use NAFTA uncertainty as leverage."