U.S. stocks steady; investors focus on quarterly earnings deluge
Investing.com -- Barclays (LON:BARC) has upgraded Tate & Lyle (LON:TATE) to “overweight” from “equal weight,” flagging early signs of margin recovery at CPK and a valuation it describes as “more than fairly” reflecting market concerns, in a note dated Tuesday.
The analysts now see a more attractive risk/reward balance following the stock’s year-to-date underperformance and evidence of stronger-than-expected underlying performance at the recently acquired business.
In an unscheduled trading update, Tate confirmed that fiscal year 2025 results excluding CPK remain in line with revised guidance issued in February.
Organic revenue is expected to decline by 5%, while EBITDA is set to rise by 4%. Free cash flow conversion of more than 75% has led to an estimated net debt/EBITDA of 2.2x at year-end, slightly better than both the 2.3x originally guided and Barclays’ forecast of 2.4x. The analysts now expect this ratio to fall to 1.9x in FY26 and 1.5x in FY27.
The upgrade is underpinned by better-than-anticipated performance at CPK, where EBITDA margin for FY25 is projected to increase by 90 basis points.
“CPK was said last week to ‘continue to trade well’, with EBITDA margin +90bps in FY25, which Tate indicated was ahead of the acquisition plan,” the brokerage said.
While the reported 17.5% margin is in line with Barclays’ forecast, the analysts note “better underlying momentum,” reinforcing their confidence in phased margin recovery.
The company aims to restore CPK margins to over 20% within two to four years, alongside a $50 million cost synergy target, 50% of which is expected to be realised by FY26.
Adjusted EPS estimates for FY26 and FY27 have been revised down by 3.9% due to FX impacts, to 47.9p and 55.4p respectively.
Free cash flow is forecast at £177 million and £205 million in those years, with net debt falling to £892 million and £779 million respectively.
Pricing remains a key concern. The company has indicated that the 2025 FBS contracting round will involve a -4% price adjustment, in line with 2024.
While management attributes this to ongoing weakness in packaged food demand rather than competitive pressures, Barclays noted, “further discounting for 2025 suggests this was not the case.”
They added that investors will be looking for more detail in May’s full-year results and at the Capital Markets Day scheduled for 1 July, particularly on pricing pressure in European segments.
Despite these pressures, Barclays sees the current valuation as attractive. The price target has been adjusted slightly from 750p to 740p due to FX revisions, representing 36.8% upside from the current share price of 541p.
The analysts noted, “at CY26e 6.7x EV/EBITDA, Tate is trading near multi-year lows and again at a material discount to key peers… despite higher margins than all three and growth profile that is no worse.”
In scenario analysis, Barclays estimates a 13% downside in a bear case where FBS margins revert to FY22 levels and CPK margins stall. Conversely, full synergy realisation and recovery at CPK could deliver 82% upside by FY28.
The potential for renewed bid speculation, including earlier reports of interest from Advent, is seen as limiting downside risk in the interim.
“As such, we see pricing concerns as fully in the price, contributing to attractive risk/reward,” the brokerage added.