Company Reports

Narrow-moat Croda reported a 10% decline in first-quarter 2024 constant-currency sales. This was primarily driven by the crop protection business, which faced a strong comparison base from the first quarter of last year, ahead of widespread customer destocking that drove volumes materially lower for 2023. Still, since much of this weakness and its phasing was already baked into the guidance shared at the beginning of the year; management confirmed the 2024 outlook for adjusted operating profit between GBP 260 million and GBP 300 million. We don’t expect to make any material change to our forecast and confirm our GBX 5,500 fair value estimate. We view shares as undervalued at current levels.

Croda is a British specialty chemicals company focused on the consumer, crop protection, and healthcare end markets. Croda targets fast-growing niches across these industries, looking to consolidate its presence by acquiring early-stage technology and science-rich firms and becoming entrenched in the supply chain of its customers through its high-touch direct selling model and a strong focus on collaborative innovation. A key driver for the company is the percentage of sales from new and protected products, or NPPs, which represented around 35% of group sales in 2022.

Narrow-moat Croda reported 2023 adjusted profit before tax of GBP 309 million, in line with its October 2023 guidance and company-compiled consensus. On a year-over-year basis, adjusted profit before tax was down 33%, hit by customer destocking in beauty care and crop protection, as well as lower covid-19 lipid sales. The 2024 outlook shared by management points to continued pressure on profitability. The company expects volume weakness to continue in crop protection as inventories remain elevated for all major customers compared with prepandemic levels and demand for industrial specialties will remain subdued. Furthermore, management expects the positive operating leverage impact from volume recovery in consumer care to be more than offset by accelerated growth of the lower-margin flavors and fragrances business and lack of high-margin covid-19 lipid sales.

Narrow-moat Croda issued a trading update that indicated customer inventory management continued to depress volumes for a large share of the portfolio in third-quarter 2023. As a result, management reduced full-year guidance group-adjusted profit before tax to between GBP 300 million and GBP 320 million, from a range of GBP 370 million to GBP 400 million previously. Despite this short-term headwind, we confirm our GBX 5,900 fair value estimate as the lower 2023 volumes and negative operating leverage are largely offset by the time value of money adjustment in our model. We view the current share price as an attractive entry point for this stock that has leadership positions in biological drug delivery and the high-value beauty actives subsegment.

We are raising our fair value estimate for Croda 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.

Croda is a British specialty chemicals company focused on the consumer, crop protection, and healthcare end markets. Croda targets fast-growing niches across these industries, looking to consolidate its presence by acquiring early-stage technology and science-rich firms and becoming entrenched in the supply chain of its customers through its high-touch direct selling model and a strong focus on collaborative innovation. A key driver for the company is the percentage of sales from new and protected products, or NPPs, which represented around 35% of group sales in 2022.

Narrow-moat Croda’s first-half results were affected by widespread customer destocking, with sales of GBP 881 million and EBIT of GBP 176 million being 6% and 33% lower, respectively, compared with the first-half pro forma results of last year, adjusted for the divestment of the majority of the performance technologies and industrial specialties business last year. This was largely expected, however, after the company issued a profit warning at the beginning of June. The EBIT delivery was even slightly ahead of FactSet consensus of GBP 174 million, which sent shares around 4% higher in early trading. Management reconfirmed 2023 full-year profit before tax guidance of GBP 370 million-GBP 400 million. This is in line with our GBP 397 million forecast, so we don’t expect to make a material change to our GBX 5,400 fair value estimate following today’s announcement. We view shares as fairly valued at current levels.

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.

Narrow-moat Croda reported 2022 EBIT of GBP 515 million, up 10% versus 2021, but broadly in line with company-compiled consensus and our forecast. In 2023, the company expects sales growth in consumer care and life sciences to be supported by demand for cropcare and noncoronavirus-related pharmaceutical products. However, management expects performance to be second-half-weighted due to the divestment of performance technologies and industrial chemicals. Despite lower volumes for COVID-19-related products, lipid system sales expectations for 2023 remain unchanged at $120 million, with growth returning in 2025 as clinical opportunities in mRNA and nucleic acids are converted into commercial projects. This seems to align with current company-compiled consensus expectations of a 5%-7% decline in sales and EBIT during 2023. Regardless, we don’t expect to make a material change to our forecast or GBX 5,400 fair value estimate. Consequently, shares continue to look overvalued.

Croda is a British speciality chemicals company, known as the leader in skincare active ingredients for the personal-care market. Actives are a niche segment, but they have the highest value because they allow companies to make performance marketing claims for their products, such as antiwrinkle creams. Continuous innovation and entrenched customer relationships have driven margins in Croda’s personal-care business to high levels. Croda includes personal-care and fragrance and flavors in its consumer-care segment, which accounts for 50% of group EBIT. A key driver for the company is the percentage of sales from new, patented, or protected products. With NPP sales reaching record levels in personal care, we are hesitant to believe margins can continue to rise unabated. Nevertheless, we expect the consumer-care segment to remain highly profitable.

Narrow-moat Croda's first-half EBIT was GBP 300 million, up 24% versus 2021. Notably, the EBIT margin increased 70 basis points as cost inflation was fully recovered through price increases. The company expects growth in the second half to moderate in consumer markets along with lower sales in lipid systems due to reduced COVID-19 vaccine demand. Nevertheless, Croda expects full-year EBIT to be modestly ahead of the current consensus, which was GBP 482 million, according to company compiled figures. We don’t expect to make a material change to our GBX 5,150 fair value estimate. At current levels, the shares look overvalued.

Narrow-moat Croda reported that business momentum remains strong in its first-quarter trading update. We don’t expect to make a material change to our GBX 5,150 fair value estimate. At current levels, the shares look overvalued.

The European chemicals sector enjoyed strong investment returns once central banks turned on the liquidity taps to combat the coronavirus pandemic in March 2020. At the start of 2022, the outlook remained bright as demand remained robust while inflation, particularly for raw materials, was expected to peak in the first half of 2022. However, we think the Russia-Ukraine war has changed the equation, leading to a more ominous picture in the back half of the year given our expectations for sustained raw material inflation and rising interest rates. Considering guidance provided by companies in the sector does not account for the impact of the Russia-Ukraine war, we think sector guidance is generally too optimistic and thus, cuts may be necessary in the second half of 2022. While our 2022 outlook for the sector has dimmed, we see opportunities at current prices. For the industrial chemical companies, we prefer Lanxess given its compelling valuation (0.5 times price/fair value estimate) and dual catalysts (business transformation, lithium project) that should create value regardless of the economic environment. For the consumer chemical companies, we prefer Chr. Hansen given its relatively attractive valuation versus peers, wide moat rating, and leading organic growth outlook.

Narrow-moat Croda reported 2021 EBIT of GBP 469 million, up 54% versus 2020 but in line with consensus and our forecast. Guidance for 2022 was typically nonspecific, indicating growth should be in line with medium-term expectations, margins should remain strong, and lipid system sales (for coronavirus vaccines) should be at a similar level to 2021 ($200 million). This seems to align with current consensus expectations for 5%-6% growth in sales and EBIT in 2022, yet the stock is trading down 5% intraday. Regardless, we don’t expect to make a material change to our forecast or GBX 5,150 fair value estimate. Consequently, shares continue to look overvalued.

Narrow-moat Croda announced it has signed a definitive agreement to sell the majority of its industrial businesses to Cargill Velocity Holdings for EUR 915 million (GBP 778 million). Shares ended flat on the day of announcement. The carve-out represents 77% of revenue in Croda’s performance technologies and industrial chemicals segments. The valuation is broadly in line with our previous estimates and results in a 5% increase in our Croda fair value estimate to GBX 5,150. With this divestment, Croda has completed its transition to a pure play consumer chemicals company focused on consumer care and life sciences. While we think certain parts of Croda’s remaining business have wide moats, such as active ingredients for personal care, we are retaining our narrow moat rating given some uncertainty around ROIC sustainability in the rapidly evolving life sciences segment. Regardless, an upgrade to wide moat would not change our view that the stock is significantly overvalued.

Croda is a British speciality chemicals company, known as the leader in skincare active ingredients for the personal-care market. Actives are a niche segment, but they have the highest value because they allow companies to make performance marketing claims for their products, such as antiwrinkle creams. Continuous innovation and entrenched customer relationships have driven margins in Croda’s personal-care business to high levels. Croda includes personal-care and fragrance and flavors in its consumer-care segment, which accounts for 43% of group EBIT. A key driver for the company is the percentage of sales from new, patented, or protected products. With NPP sales reaching record levels in personal care, we are hesitant to believe margins can continue to rise unabated. Nevertheless, we expect the consumer-care segment to remain highly profitable.

Croda is a British speciality chemicals company, known as the leader in skincare active ingredients for the personal-care market. Actives are a niche segment, but they have the highest value because they allow companies to make performance marketing claims for their products, such as antiwrinkle creams. Continuous innovation and entrenched customer relationships have driven margins in Croda’s personal-care business to high levels. Croda includes personal-care and fragrance and flavors in its consumer-care segment, which accounts for 45% of group EBIT. A key driver for the company is the percentage of sales from new, patented, or protected products. With NPP sales reaching record levels in personal care, we are hesitant to believe margins can continue to rise unabated. Nevertheless, we expect the consumer-care segment to remain highly profitable.

We award Croda an Exemplary capital allocation rating based on our assessments of the balance sheet, investment, and shareholder distributions. The balance sheet is sound. We see little credit risk. Croda’s business risk is low, debt levels are very low and the maturity schedule is long-dated.

We previously asserted narrow-moat Croda was set for a stellar 2021, as reflected in our above-consensus estimates. However, even our aggressive stance has proven too conservative. The company reported first-half EBIT of GBP 242 million, beating the Visible Alpha consensus by nearly 18%. This drove the shares 6% higher on the day. Sales for lipid systems supporting Pfizer’s COVID-19 vaccine were the biggest driver, although the rest of the business was also strong. Croda revised its 2021 sales expectations for COVID-19 lipid systems to at least $200 million from $125 million previously. We will raise our near-term estimates but continue to expect the COVID-19-related sales to fade over time. Consequently, we don’t expect to make a material change to our GBX 4,600 fair value estimate. At current levels, the shares look significantly overvalued.

Narrow-moat Croda announced a strategic review for its performance technologies and industrial chemicals segments, which are the parts of Croda’s business portfolio that are focused on industrial end markets. Full or partial divestment will be considered as part of the review, which is expected to be completed by the end of 2021. We maintain our GBX 4,600 fair value estimate but view full divestment of these businesses as likely positive for the moat and valuation. However, this certainly wouldn’t close the gap to the current stock price as shares are trading in 1-star territory.