Kepler downgrades Tate & Lyle to 'reduce', looks to lock in profits

Kepler Cheuvreux downgraded Tate & Lyle to 'reduce' from 'buy' and cut the price target to 620p from 630p as it looked to lock in profits since its upgrade of the stock.

The bank cited doubts about Tate's ability to beat peak-year 2017/18 in terms of operating performance as the main reason for its change of stance.

"Although we expect the current year to be quite similar EBIT-wise, we see big downside risks to the Sucralose and commodities businesses (together circa 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."

Kepler said that at 15x estimate 2019/20 price-to-earnings, the stock is no longer cheap.

"A price-to-earnings comparison with main peer Ingredion shows a 20-25%+ premium for Tate & Lyle. 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."

At 1030 BST, the shares were down 2.4% to 662.80p.