LONDON -- Giant sweetener-producer Tate & Lyle (LSE: TATE ) has ridden the equities wave since the start of the year and is still up 9% so far in 2013 despite the recent risk-aversion striking financial markets.
Although food producers like Tate & Lyle tend to harbor defensive qualities -- populations still need to be fed, regardless of the economic climate -- I believe the company could face severe earnings pressure in coming years as competition in its most important markets heats up.
Sucralose volumes headed lower
Tate & Lyle published worrying third-quarter numbers last month, showing weakening demand growth for its artificial sweetener sucralose. The firm now expects sales volume in the year ending March 2013 to come in lower than that of the preceding 12-month period.
Tate & Lyle is expected to face mounting competition in this market, particularly from the Far East, where sucralose production is set to take off. Last month, China's JK Sucralose, the world's second-largest producer of the product, announced that it hopes to ramp up capacity to 6,000 tonnes by 2018 from around 1,500 tonnes at present. It also said it expects sales to leap 50% this year.
Elsewhere, competitor PureCircle -- the world's leading manufacturer of natural sweetener stevia -- is also reporting rocketing volumes as consumers switch from synthetic alternatives, and it's due to roll out a range of fresh products in the near future.
Earnings expected to drop in 2013
City forecasters expect Tate & Lyle to post an earnings-per-share decline of 4% to 55 pence in 2013 before recovering modestly in the following years. Respective gains of 9% and 8% are expected in 2014 and 2015.
The sugar specialist was recently changing hands on a P/E ratio of 15, representing a premium to the forward reading of 11.9 for the entire food-producers and -processors sector. This is expected to head lower over the medium term to 13.8 this year and 12.8 next year.
However, the emergence of growing competition in Tate & Lyle's key markets could pressure the company's revenue forecasts, which I believe makes Tate & Lyle an expensive choice against its peers right now.
Dividend policy progressive but underperforming
Tate & Lyle is expected to provide a 26.1 pence dividend in 2013, up from 24.9 pence in 2012. And the firm is predicted to ramp these up to 27.6 pence and 29.4 pence, respectively, in 2014 and 2015. Further, these payments are well secured with projected coverage of between 2.1 and 2.2 times through to 2015.
Despite these expected dividend increases, the company's yield is forecast to remain below the 3.5% mean reading for the U.K.'s 100 biggest listed firms over the medium term. Respective yields of 3.1% and 3.3% are expected this year and next before reaching 3.5% in 2015.
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