Tate amp Lyle in sticky spot over Sucralose

Tate & Lyle shares traded around 17% lower this morning after the company warned supply chain disruption and increased competition would hit annual profits.

The veritable British company famous for its eponymous sugar brand said the environment for its Splenda Sucralose sugar substitute had become more competitive in the second quarter.

Tate said it now expected to incur additional previously unforeseen costs of about £20m in its second quarter, bringing total costs for the first half to £40m, plus an additional £10m in the second half of the year.

The effect of these added costs will be group adjusted profit before tax for the full year in the range of £230m to £245m.

This compares with £322m in the previous full year and £327m the year before that.

This is the second profit warning by the food ingredients firm this year.

In February, Tate scaled back its outlook for the full year, saying weak sales volume in developed markets dampened third-quarter results.

It said at the time profits for the full year to 31st March would be in line with the prior year, whereas before the company had forecast growth.

Sucralose and supply chain issues seem deeply-rooted

This further instance of the firm apparently being unable to predict or smooth-out disruptive operational effects over the medium term suggests structural issues, both in its ingredients supply chain (although these might be cyclical) and in the Sucralose business.

Therefore, it looks likely market forecasts will need to fall into line with the company’s revised guidance.

Note the prospective price-to-earnings ratio of 14.6 is still trending significantly higher than the firm’s 10-year median.

With earnings forecasts expected to fall, the impact on Tate’s FTSE 250-listed shares is likely to be more losses, even after this morning’s fall wiped-out the gains made since July.

The stock looks underpinned on a very long-term basis, though the current loss appears to be challenging trend line support originating in March 2009.

The nearest floor of that support today would be 594p, although that is highly unlikely to be breached today.

Should the level break in the near term though, next visible support would come in around 559p-to-560p.