Tate & Lyle (TATE) - whose name is still linked with many to sugar manufacturing - may benefit from the trend towards healthier eating. The company now processes corn to make sweeteners and starches for the food and beverage industries – as does rival firm Ingredion (CNP).
Morningstar analysts point out that both firms could benefit from an increased demand for these ingredients. This is being driven by a number of factors, most notably the trend to reduce unhealthy contents in processed food – like fat, salt and sugar – and to reduce the calorie content. These ingredients can also reduce raw material costs. In addition growing urban populations, and more women working in developing market, alongside the increased consumption of “snacks” and convenience foods in developed markets should help sustain demand for their products.
However, Morningstar analysts said both companies face challenges in the sweetner market, as market, where the risk of new entrants, including disruptive technology that displaces existing products is high. Both these firms are more capital-intensive than peers because they process corn as a raw material – so margins and returns on invested capital are also lower.
For this reason Morningstar analysts attribute no moat ratings to either company, although they believe their moat trends are stable.
Specialty ingredients - those formulated with a specific customer's requirements in mind, are expected to grow faster than bulk ingredients, which are standardized and compete essentially on price. Volume growth in specialty ingredients should reach 4%-5%, with bulk ingredients not growing or declining slightly. Morningstar analysts said: “Given the radically different growth rates, both companies will see nearly all EBIT growth coming from specialty ingredients.”
They added: “Tate & Lyle has a higher exposure to specialty ingredients (39% of sales, 64% of EBIT) than Ingredion (25% of sales, estimated 47% of EBIT) because it started to privilege growth in specialty earlier at the expense of bulk ingredients. Ingredion is likely to catch up by acquiring specialty ingredients companies.”
However, equity analysts said, despite this it still preferred Ingredion. “Of these two firms, we prefer Ingredion because it has a solid track record of growth, a capable management team, and high exposure to emerging markets (estimated at 37% of sales) where much future growth is expected. We have 14% upside to our fair value estimate on Ingredion.
“That said, our Best Idea in the space is Symrise (SY1), a narrow-moat ingredient company trading at a nearly 25% discount to our fair value estimate, and International Flavors & Fragrances (IFF), also a narrow-moat business, trading at a more than 20% discount.”
