Tate & Lyle plc: Barbarians At The Gate?

In addition to following activist investors and their investment targets, many investors ask the question if it is possible to predict which companies will be targeted by activist investors. The motivation to do this is understandable.

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First, once activists are onboard, they will actively influence company and will do all in their power to make sure business value is reflected in the share price.

Second, disclosure of share ownership by activist investors and large hedge funds is moving the shares of company up. Identifying future targets can give investors an extra edge and improve returns. As British economist John Maynard Keynes said,

“Successful investing is anticipating the anticipations of others”

Can this be done? And if yes, how?

I think that the most important thing to remember is that activist investors are still investors, not unlike any other, and they are mostly value investors.

The question then is what really attracts activist investors? How is it possible that despite all of market efficiency, a small pack of activist investors and hedge fund managers continue to come up with great investment ideas? Why these opportunities do not disappear?

I think that great investment managers are also good storytellers. Many investors believe that making good investments requires excellent skills in the analysis of financial accounting statements, building complex and detailed valuation models, forecasting future profitability of companies and otherwise analyzing numbers “to death”.

In my book "Story Investing"  I argue that best investments are just like good stories or movies: with three part structure, important turning points, intrigue, drama, and surprises. One of the highlights of the approach is the proposal to develop both a narrative for the company and its share price.

Of course, such approach is highly dependent on one’s personal interpretation of company’s story. This storytelling should be supported by standard analytics and fundamental valuation. But it is this art of narrative thinking and story composition that will ultimately make a difference.

One of the main attributes of companies that are being targeted by activist investors is the significant underperformance compared to peers or general market indices.

Take the case of Tate & Lyle plc: company's share price returned -5.5% during past five years, compared to a positive +24.8% return on FTSE 100 Index (excluding dividends). I think that there is a high chance that in current market environment, a company such as Tate & Lyle plc will go unnoticed by radar's of activist investors or large hedge funds. It operates in the relatively stable segment of ingredients for consumer goods (food), it is a relatively large company, it does not have a lot of debt, free cash flow is attractive, and its share price has been stagnating over past five years, significantly underperforming general market index (FTSE 100). All these make the company highly likely (in my view) to become a target of activist investor or a possible merger or acquisition target.

Company profile

Tate & Lyle is a global provider of ingredients and solutions to the food, beverage and other industries, with operations at more than 30 facilities worldwide.

Tate & Lyle operates through two global divisions, Speciality Food Ingredients and Bulk Ingredients. Speciality Food Ingredients consists of three platforms: Texturants, which includes speciality starches and stabilisers; Sweeteners, which comprises nutritive sweeteners and a range of no-calorie sweeteners including SPLENDA® Sucralose; and Health and Wellness portfolio which includes speciality fibres and salt-reduction offering. Additionally, Food Systems business provides a wide variety of blended ingredient solutions.

Tate & Lyle Bulk Ingredients includes bulk sweeteners, industrial starches and fermentation products (primarily acidulants). Corn co-products from both divisions are primarily sold as animal feed.

Valuation narrative

Tate & Lyle plc currently has a market cap of GBP 2,904 million, net debt of GBP 452 million, and enterprise value of GBP 3,356 million. During last fiscal year, EBITDA was GBP 470 million (pre-exceptional EBITDA, company's annual report). This values the company at an EV/EBITDA multiple of x7.14. Adjusted free cash flow (company's annual report) equaled GBP 174 million, which values the company at a P/FCF multiple x16.7 or a FCF Yield of 6%. Current dividend yield (2016) is 4.5%.

If Tate & Lyle plc will continue to generate similar annual free cash flow over next three years, it will generate a total free cash flow of GBP 522 million. Applying x12 EV/EBITDA valuation multiple to company’s EBITDA would value company’s equity in three years at GBP 5,710 million or GBP 12.26 per share. This target price provides a potential upside of 97% from current share price.

We believe that Tate & Lyle plc's shares provide an attractive investment opportunity for long-term, value-oriented investors.

Article by Alex Gavrish, Etalon Investment Research; author of "Story Investing