Croda: Difficult Trading Environment Continues to Hit the Bottom Line; Shares Attractive

Narrow-moat Croda CRDA 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.

Most of the decline in volumes can be attributed to the somewhat commoditized, less differentiated subsegments of the portfolio such as beautycare (formulation adjuvant ingredients) and crop protection. The latter’s volumes are now expected to improve in first-half 2024. Beautycare volumes are faring relatively better and started to recover in September, which is expected to continue in the fourth quarter. The industrial specialties segment (selling the byproducts of other segments) is now expected to deliver a loss in the second half of the year given weak industrial demand.

The beauty actives subsegment should deliver marginally positive organic sales growth for the year as a strong price and mix contribution continued to offset low volumes in the third quarter. The healthcare business should benefit from COVID-19 lipid system sales in the fourth quarter, as planned. Further to this, we expect it to return to double-digit sales growth in 2024, given the company’s hefty pipeline in biologics delivery.