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Jefferies has had enough of Tate and Lyle 'for now'
Tate and Lyle's new chief executive Hampton has already left a mark on the agribusiness, providing fresh clarity on strategy and decisive action on costs, something that has seen the firm's share price be well-rewarded.
Analysts at Jefferies welcomed the fresh blood and said experience suggests that, when valuation returns to a more normal range, near-term earnings anxiety tends to prevail over longer-term re-rating aspirations and with Tate & Lyle's guidance stretching, and given their modestly below-consensus view, they preferred to return to the sidelines on the firm.
Jefferies felt Tate and Lyle's prelims delivered "welcome fresh impetus and strategic clarity", plus sought-after decisive action on costs, but noted that the challenges of assembling a top-table food and beverage solutions business remained "as intractable as ever", with the bulk of the cost savings already earmarked for reinvestment.
Furthermore, optimism surrounding the future of NAFTA in late April seemed to have "evaporated", the broker said, with the agreement having become nothing more than "collateral damage in a wider trade war" between the US and Canada.
There was scope for a bilateral agreement with Mexico in order to save the situation, but the US dollar to peso exchange rate continued to "discount gloom", it said.
The quality of its fiscal year 2019 guidance for sales, which was based on the projected impact of tax cuts and technical change on the financing line, was also "less than premier cru", analyst Martin Deboo wrote.
"When we upgraded TATE last October, our core thesis was that NAFTA risk was being mispriced, on the basis of what was then 12% underperformance to INGR since the US Presidential Election and 23% since the May 2017 high. But TATE has now out-performed INGR by 40% since the March trough and trades at PER parity, relative to the recent 25% discount," the broker said.
"That's enough for now for us," Jefferies concluded.
All in all, Jefferies downgraded its recommendation on Tate and Lyle from 'buy' to 'hold', but upped its target price on the London-based firm's shares from 665p to 670p.