Is it worth investing in Tate & Lyle right now?

There are rumours that Tate & Lyle, one of Britain’s oldest public companies, could soon be picked off the stock market. Reports are circling that the private equity firm Advent International could make a takeover offer for the 160-year old food business. Given Tate’s turbulent share price performance over the past decade, it is arguably only a matter of time before a buyer officially makes a move and shareholders could be forgiven for agreeing to an easy way out. But is takeover interest in Tate yet another sign of a woefully undervalued UK plc?
Tate & Lyle is best known for its sugary history, but the £2.9 billion group has radically transformed its business in the past decade. It sold its sugar business in 2011, although confusingly it still operates under the same trading name. The FTSE 250 business also sold its starch division and its controlling stake in a commercial sweeteners business in the Americas, where it made most of its revenue, to a private equity group for $1.3 billion in 2021.
Tate has instead focused on specialised “ingredient solutions” — products sold to manufacturers, often to help make their drinks, snacks and sauces healthier without compromising on taste or texture. In its last financial year, Tate made £1.4 billion of its £1.6 billion in annual revenue from these food and beverage solutions. The remainder came from its sucralose division, where it sells a high potency no-calorie sweetener, and a small portion from its “primary products Europe” division, the commoditised part of its corn wet milling capacity.
The idea was that a slimmer portfolio could help build up a stronger profit margin. But Tate’s $1.8 billion acquisition of the pectin and gum producer CP Kelco left shareholders with a sour taste earlier this year.
The deal should push up group revenue by around 30 per cent, though the $1.15 billion cash component of the agreement adds some pressure to Tate’s balance sheet. Its net debt to adjusted cash profit ratio is expected to rise to a multiple of 2.3, up from 0.5 as of the end of March, though within its long-term target range of 1 to 2.5. But CP Kelco’s mixed financial record is the main concern: revenue growth has been decelerating since 2021 and fell by 3 per cent in 2023. Its adjusted cash profit margin has declined to 17 per cent in 2023 from 22.6 per cent in 2021. The prospect of a turnaround project for Tate, still fresh from its own major restructuring, is a difficult one for long-suffering shareholders to swallow.
An improved CP Kelco could be a strong fit for Tate’s new look, with its range of pectins, gums and other nature-based ingredients fitting in well to its new strategy. This column last tipped the stock as a buy in the summer — citing the prospects of CP Kelco expanding Tate’s product range — when it was at a modest price to earnings ratio of 10.8 and offered a respectable dividend yield of 3.2 per cent. Thanks to rumours of takeover interest, the shares have since delivered a total return of 26 per cent.
It is easy to see why Tate could turn heads: profits have been growing and there is still room for it to improve its adjusted cash profit margin, which stood at 19.9 per cent at the end of March. But there has still been no official confirmation about a possible offer, although the stock has held its ground above 760p, compared with 745p before reports started circulating.
Even so, Tate trades at a cheaper level than its much bigger ingredient rivals, at a forward price to earnings multiple of 14, compared with 20.6 at the Dublin-listed Kerry group and 38.2 at the Dutch food business DSM-Firmenich. Given its relatively small size, Tate is unlikely to attract a premium to match the bigger fish in the sector.Advice Hold Why Shares unlikely to fetch a premium to match bigger industry rivals
It is true that there can be too much of a good thing: a suspiciously high dividend yield usually suggests there is such a high degree of risk associated with a stock that investors demand bigger cash payouts. At RWS, the Aim-listed language services group, a forward yield of 9 per cent should set off alarm bells.
RWS, which is headquartered in Buckinghamshire, specialises in translation services. It has four main divisions: language services, intellectual property services, regulated industries and technology, where it also has artificial intelligence-enabled solutions that help its clients to create and automate content across the world.
The group has been struggling with weak sales growth. In its most recent half-year results, total sales fell by 4 per cent to £350 million and adjusted pre-tax profits fell 16 per cent to $45.6 million. Cash flow has also suffered, with cash conversion at just 30 per cent compared with 85 per cent the year prior, thanks to weak sales, planned investments and what the company said was a “short-term lengthening of debtor days”, which suggests some of its customers were struggling to pay their invoices on time.
The shares stumbled again yesterday, falling by as much as 16 per cent, even after RWS said it had returned to growth in the second half of its 2024 financial year, delivering revenue growth of 2 per cent on a constant currency basis. Adjusted pre-tax profits should be in the range of £110.4 million to £114.4 million for the full year, but that did not take into account the impact of foreign exchange on its accounts. When including FX movements, profits are expected to take a £3 million hit, which has led analysts at the broker Berenberg to downgrade its earning forecasts by around 23 per cent for next year.
The shares trade at a forward price to earnings ratio of just 6, compared with an average of 18.9 over the past decade. True, there are some signs of more consistent growth, but it could still be a long road ahead to a recovery across the whole group. Investors may be better off leaving RWS in the bargain bin for now.Advice Avoid Why High yield represents very high risk