Interactive Investor

ii view: chemicals company Croda cuts profit forecast again

Shares in this FTSE 100 firm have lost over half their value since the end of 2021 and are down 30% year-to-date. We assess prospects.

9th October 2023 11:21

by Keith Bowman from interactive investor

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Third-quarter trading update to 30 September

Company now expects full-year adjusted pre-tax profit of between £300 million and £320 million, down from £370 million to £400 million

ii round-up:

Speciality chemicals maker Croda International (LSE:CRDA) today issued a further profit warning as both customer destocking and reduced demand continue to hurt. 

Annual adjusted pre-tax profit is now expected to come in at between £300 million and £320 million, down from the previous estimate of £370-£400 million and versus last year’s £780 million. Croda had already cut estimates in June when it first warned of problems. Then, analysts had been forecasting profit of £440 million.

Shares in the FTSE 100 company fell by more than 5% in UK trading having come into this news down by around 30% year-to-date. Smaller peer Synthomer (LSE:SYNT) is down by more than three-quarters following a series of profit warnings, while the FTSE 100 index itself is down around 1% in 2023. 

Croda makes ingredient chemicals for industries including beauty care product makers and life science drug and farming chemical manufacturers. 

Sales volumes for beauty care related products had proved lower than expected in July and August, with North America not recovering from quarter two. However, volumes had improved in September, with management expecting the recovery to continue during Q4. 

Sales of crop protection products under its Life Sciences business had weakened further, with a recovery not expected to start until the first half of next year. Sales for its smaller Industrial Specialties business remained hit by weaker global demand. 

Management actions to counter challenges include a further focusing down on costs. Full-year results to 31 December are scheduled for 27 February. 

ii view:

Started in 1925, Croda today employs over 5,000 people. Headquartered in Snaith East Yorkshire, operating profit over its last full financial year was split almost evenly between Consumer Care and Life Sciences, with its remaining Industrial Specialties business generating around 15%. Consumer Care products include chemicals for personal and home care items, with Life Science chemicals assisting both pharma companies such as Pfizer Inc (NYSE:PFE), and its Covid-19 vaccine and seed care product companies. 

For investors, the influence of the pandemic in previously fuelling customer demand is likely now playing out, as customer stock supplies are used at the expensive of new sales. The challenging economic backdrop also continues to affect consumer demand, elevated costs for businesses remain, while the broader issue of chemicals and their impact on the environment also warrants consideration.   

On the upside, management is taking action to counter difficulties, and the company does enjoy diversity in both business type and geographical region. Bolt-on acquisitions for both Life Sciences and Consumer Care have previously been made, while a record of more than 20 years of consecutive annual dividend increases should not be overlooked. 

Some investors will likely seek to exploit this latest sell-off, backing a company that should benefit from areas of growth such as life sciences. However, current pressure on customer demand will likely convince many others to hold fire until there's solid evidence of a recovery.

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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