Croda Earnings: Continued Weakness in Crop Protection Leads to More Pessimistic 2024 Guidance

Narrow-moat Croda delivered first-half 2024 adjusted profit before tax of GBP 127 million, in line with the company-compiled consensus. Constant-currency group sales were down 4.4% compared with the same period last year as market conditions remained challenging for the life sciences segment, affected by customer destocking across crop protection and consumer health. This has made management slightly more pessimistic regarding the full-year 2024 guidance for adjusted profit before tax that was narrowed to GBP 260 million to GBP 280 million from GBP 260 million to GBP 300 million previously given no sign of recovery for crop protection in the second half. We don't expect to make a material change to our fair value estimate of GBX 5,500 after we incorporate in our forecast the slightly worsened 2024 outlook. Over the last year and a half, Croda’s earnings have been substantially depressed compared with historical and prepandemic levels given a pronounced impact from customer destocking actions, especially on the lesser differentiated, volume-intensive parts of the portfolio. This has led to record-low capacity utilization levels for Croda’s manufacturing plants. Compared with the historical average of 80% and over, Croda’s capacity utilization rate fell to between 50% and 55% in 2023 and 65% in the first half of 2024 according to management. We expect the short-term volume headwinds to abate starting with 2025, which should result in gradually improving capacity utilization rates and operating margin. Further, Croda’s solid innovation pipeline in some high-value niches such as biologic drug delivery and beauty actives should support longer-term sales and margin growth, offering substantial share price upside for patient investors.