Croda: Enviable Life Sciences Portfolio Should Support Accelerated Growth Over Next Decade

We are raising our fair value estimate for Croda CRDA by around 10% to GBX 5,900 per share following a transfer of coverage and a fresh look at our long-term thesis. We are now more positive about the company’s long-term top-line growth trajectory, primarily driven by the life sciences segment. Here we expect the sizable customer and innovation pipeline for Croda’s differentiated drug delivery portfolio to translate into high-single-digit revenue growth for the segment through 2027 and beyond. We view the shares as relatively fairly valued at current levels, although limited upside still remains in our valuation.

We confirm our narrow moat rating, supported by intangible assets and switching costs. We see some particularly sticky businesses for Croda in beauty actives (the basis for substantiated performance marketing claims in customer products) and in specialty drug delivery systems. A useful proxy for superior quality in the portfolio is represented by the percentage of sales of products that are new, patented, or protected in some way, for example by know-how or differentiated qualitative features. The metric currently sits at around 35% for the group (40% in consumer care and around 30% in life sciences).

In 2023, Croda’s revenue and profit have been affected by widespread customer inventory management and increased competition at the bottom end of the portfolio, especially in the beautycare subsegment. Here Croda operates a sizable portfolio of heritage ingredients (such as surfactants) that form the backbone of any personal care formulation without contributing any benefits to the skin or targeted area. Beyond 2023, we expect to see a normalization in market conditions, a return to mid- to high-single-digit revenue growth for the group, and gradual operating margin improvement (reaching 25.5% by 2027 in our forecast) as Croda continues to focus on fast-growing, high-margin niches across consumer care and life sciences.