Broker snap: UBS downgrades Tate & Lyle on lofty valuation

9th Sep 2013 09:10

Sugar and food group Tate & Lyle (T&L) was in the red on Monday morning after UBS downgraded the firm from 'neutral' to 'sell', saying that the share price is currently too expensive.The Swiss bank said that the stock's valuation is overly high and does not reflect that "sucralose prices continue to decline as 'generic' competitors improve product quality and access greater scale".UBS added: "Nor, judging by the premium T&L enjoys to close peer Ingredion, does it recognise that ex-sucralose T&L is a horizontally integrated corn processor whose gross margins can be volatile and whose return on capital is significantly below that of branded consumer goods companies."It warned that the steady trend of improving gross margins at T&L over the last three years - helped by a tight high-fructose corn syrup (HFCS) market in North America, higher EU sweetener prices and a bounce in industrial starch demand after a collapse in 2008-09 - could be coming to an end due to lower sugar prices.The bank also highlighted the group's low dividend payout ratio which - along with a strong balance sheet - "suggests management would prefer to potentially make acquisitions than return cash to shareholders".UBS has cut its target price for T&L's shares from 890p to 770p.The stock was down 2.54% at 786.5p by 09:23.BC