Sweetener and starch manufacturer Tate & Lyle (TATE) reported in-line annual results to the end of March 2016, showing a 1% increase in constant-currency adjusted pre-tax profit, consistent with management's guidance for a similar level to the previous year. We are increasing our estimates for exceptional reasons: higher-than-expected proceeds from the sale of assets, driving debt levels down, and higher expected foreign exchange benefits from this year onwards, given Sterling's weakness in recent months. As a result, our fair value estimate increases 10% to £5.50, but we are retaining our no-moat rating and its stable trend.
We think T&L is losing market share. The sucralose market remains in significant excess supply
The results are not high-quality ones, and the outlook remains uninspiring. Speciality food ingredients, 64% of adjusted earnings before tax, reported further weak volume growth of only 1%, driven by weakness in North America as demand for starch-based ingredients weakened with some large customers, and Latin America saw a sharp decline.
We think T&L is losing market share to Ingredion in speciality ingredients in Latin America. Sucralose profits remained weak and would have fallen further, were it not for a significant drop in the depreciation charge. The sucralose market remains in significant excess supply, with the prospect of several more years of price declines cancelling out any benefit of higher volumes.
Bulk ingredients saw a 3% volume increase, breaking a multiyear trend of volume declines, much of which is due to the acquisition of another plant, in addition to a good U.S. beverage season, which saw the soft-drink market drop by less than expected. We expect a return to declining volumes. This business has further negative exposures: declining demand for paper and printed materials and continuing low ethanol prices.
The shares continue to price in overly fast growth, but we believe T&L will be the slowest-growing of the eight ingredients companies under our coverage. We see no interest in the shares at these levels.