Tate & Lyle share price 'too optimistic', says analyst
to hold on to market share for sucralose once its patent expires,
says market analyst Morgan Stanley.
"Long-term fundamentals of sucralose do not support the current share price", said the market analyst in a report published last week.
"Within three years of generic competition to sucralose, its price will decline by 30 per cent, Tate & Lyle will lose 30 per cent share in the market and its earnings margins will drop from 48 per cent to 10 per cent."
The analyst points out that this scenario has happened before. When sweetener NutraSweet was exposed to competition, aspartame margins fell by 80 per cent. Morgan Stanley argues that sucralose could also suffer a drop in profits margins when this happens.
There is no doubt that sucralose is the engine of growth for Tate & Lyle, which believes that its sucralose product is well-protected. Increased demand for Tate & Lyle's calorie-free sweetener helped the company to record a first-half profit increase of 59 per cent.
Recently released results reveal that profits of £33 million from the firm's Splenda sucralose business were £7 million higher than in the comparative period last year, contributing significantly to a net income in the six months to 30 September of £94 million, up from £59 million a year earlier.
The US-based broker also accepts that Tate & Lyle's sucralose business looks set for impressive earnings growth in the near term. The ingredient giant has recently increased its capacity in order to meet pent-up demand.
"We think that sucralose will take significant market share from other high-intensity sweeteners and that it will continue to grow the category, trebling net manufacturing capacity over F2004-07," said Morgan Stanley in its report.
"We do not expect a superior one to appear suddenly on the market."
But while the company's patents will provide protection for some years yet, Morgan Stanley believes that sucralose will eventually commoditise.
"We believe this growth is already reflected in the share price," said the report. "We think the current price discounts full generic competition beyond F2018, which is optimistic given the uncertainty over patent protection."
Sucralose is made from sugar. Three hydrogenoxygen groups on the sugar molecule are replaced by chlorine atoms, which results in a sweetener 600 times more intense that sugar. Because sucralose is not recognised by the body as digestible it has zero calories.
Sucralose is sold exclusively to McNeil Nutritionals, which markets the product as Splenda.
Demand for such artificial sweeteners is likely to continue togrow, driven by continued demand for lower-calorie/dietproducts. Additional demand could also come frommanufacturers that want to lower the calorie count in theirproducts without necessarily flagging the product as 'diet'.
