Croda: Profit Warning Due To Customer Destocking Brings Stock Back To Fairly Valued Territory

Narrow-moat Croda shares were down around 12%-15% intraday after the company released a profit warning due to unexpected customer destocking. Referencing the first five months of the fiscal year, volumes in consumer care were down by double digits. In life sciences, the crop protection business was described as now experiencing rapid customer destocking plus the mix is weaker compared with the prior-year period due to lower sales for COVID-19 applications. Destocking is expected to continue in the second half of the year whereas the company was previously expecting a stronger demand environment in that period. Consequently, fiscal 2023 profit before tax is now expected to be between GBP 370 million and GBP 400 million, well below company-compiled consensus of GBP 452 million. We have been more bearish than consensus for quite some time and were already forecasting 2023 profit before tax of GBP 397 million. As a result, we don’t expect to make a material change to our GBX 5,400 fair value estimate. Croda shares have been overvalued for years in our opinion, and even surpassed GBX 10,000 during the pandemic due to rapid growth in its business supporting the COVID-19 vaccines. However, the June 9 downward move has finally put the stock back in fairly valued territory.