Interactive Investor

ii view: blue-chip chemicals company Croda on the up

20th May 2022 11:32

Keith Bowman from interactive investor

Soon to be a more focused business and with an enviable dividend record. We assess prospects.  

AGM trading update

ii round-up:

Speciality chemicals maker Croda International (LSE:CRDA) today outlined strong trading in 2022, with continued sales and profit growth seen across the company.

Significant cost inflation continues to be recovered, leaving management’s expectations for the full year unchanged.

Croda shares rose by more than 3% in UK trading having come into this latest update down by around a third year-to-date. Shares for smaller rivals Victrex (LSE:VCT) and Synthomer (LSE:SYNT) are down by around 30% and 25% respectively during 2022. The FTSE All World index has fallen by 17%. 

Demand in North America and Asia has proved particularly strong year-to-date, and April sales in China were ahead of the prior year despite local pandemic lockdowns. The two regions combined accounted for just under half of total sales during 2021.

Good growth in Beauty Actives, Beauty Care and Home Care continued to aid its Consumer Care business. Meanwhile, Fragrances and Flavours is being helped by cost savings made following its recent acquisition of Parfex.  

The Life Sciences business is being aided by robust demand for Crop Protection chemicals and continuing capacity expansion across its health care platforms. Its products include chemicals used by Pfizer (NYSE:PFE) in relation to its Covid vaccine.

The sale of most of Croda's Performance Technologies and Industrial Chemicals businesses is continuing to plan and is expected to complete in the summer.

First-half results are scheduled for 29 July. 

ii view:

Started in 1925, Croda is today a speciality chemicals company employing over 6,000 people. A constituent of the FTSE 100 index, it currently operates across four divisions, but with the majority of two of those being sold. The remaining Life Sciences and Consumer Care businesses have been faster growing, deliver higher profit margins, enjoy lower cyclicality and are capital and carbon footprint light. 

For investors, a tough economic outlook now overshadows demand for many products going forward. Elevated inflation and a cost-of-living crisis combined with rising interest rates may see consumers globally cutting spending. Pandemic related uncertainty in China also warrants consideration, while an estimated price/earnings (PE) ratio above the 10-year average also suggests the shares are not necessarily cheap, despite the sharp decline in share price this year. 

More favourably, performance to date remains robust, a more focused business is emerging, while bolt-on acquisitions for both Life Sciences and Consumer Care were previously made. A record of more than 20 years of consecutive dividend increases is also noteworthy. On balance, and while some caution looks sensible, this well managed business looks to remain worthy of longer-term investor support. 

Positives: 

  • A diverse product and customer base
  • A progressive dividend policy 

Negatives:

  • Uncertain economic outlook
  • Environmental concerns

The average rating of stock market analysts:

Strong hold

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