First half sales grew by 4.6% organically to £881mn. Consumer care led the way with growth of 8.3%, but the group’s smallest division, Industrial Specialities, saw a 1.9% decline. Sales trends improved across all divisions in the latter part of the period.
On an organic basis, adjusted operating profit was up by 6.7% to £156mn, benefitting from improved pricing and sales mix as well as cost savings.
Free cash flow increased by £10mn to £38mn, and net debt fell by 0.4%, to £578mn. The interim dividend was held at 48p per share.
Full-year organic sales growth guidance remains at 3-6%.
The shares were flat in early trading.
Our view
Croda’s first-half results showed encouraging momentum and strong execution of its transformation plan, but unchanged guidance and dividend left little obvious near-term catalyst for investors.
Given improving sales trends and continued cost savings, we think that guidance now looks cautious, despite geopolitical uncertainty.
Croda develops and supplies ingredients for industrial applications, the life sciences, and consumer care brands. It’s a relatively small player in the chemicals sector, so we support the renewed focus on innovative niche products in attractive markets.
Its nimbleness at bringing products to market, combined with a broad manufacturing footprint, drives R&D-based relationships with local and regional customers. These tend to consume more specialised end products, which can enjoy higher growth rates and strong pricing power, supporting profitability and translating into higher growth rates for New and Protected Products.
Global trade policy remains a risk to monitor but another problem the regional focus can help mitigate. In the US, for example, 70% of sales are manufactured locally. Croda’s pivot towards emerging markets should also lower the direct exposure to tariffs, as well as provide further growth opportunities.
Looking ahead, Croda’s well exposed to some attractive growth drivers. In consumer care, growing demand for more sustainable cosmetics, flavours and fragrances plays well to Croda’s strengths. Its efforts to adjust to consumer preferences are bearing fruit, but we still see this division as sensitive to economic conditions.
It’s known for delivery systems for mRNA-based medicines such as Pfizer’s COVID-19 vaccine. Regulatory headwinds in the US have caused some uncertainty for the pharmaceutical industry. But we remain positive on the long-term outlook for drug development, which is a key demand driver for Croda’s products in this space.
Food security and sustainable agriculture are also long-term opportunities, as farmers adapt to changing weather patterns, resource constraints and shifting pest pressures. But agrichemicals can be a volatile end market, and crop protection sales are currently under pressure.
Improving cashflows and reasonable debt levels are other attractions, which should help support the 3.8% yield. But there are no guarantees.
Croda’s valuation remains well below its long-term average, suggesting that investors remain unconvinced by the recovery story. We think that management is taking the right steps to improve performance, with room for forecasts to move higher if momentum continues. But demand remains sensitive to market conditions, and any deterioration risks overshadowing operational progress.
Environmental, social and governance (ESG) risk
Chemical companies trend between medium and high risk in terms of ESG. The primary risks facing the sector include carbon emissions from operations, the environmental and social impact of its products, waste management, and human capital.
Sustainalytics rates Croda’s management of ESG risks as strong. Although it seeks to meet Environmental Management System standards, not all of its plants are certified. Ambitious science-based emissions reduction targets have been set, and progress is positive, but the approach could be improved by a published climate transition plan. On waste, there are robust emergency response plans and recycling programs. The company is seen as a fair and supportive employer with a good approach to health and safety. However, there’s still work to do in terms of long-term talent development in this knowledge-intensive industry.
Croda International key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember that yields are variable and not a reliable indicator of future income. Keep in mind that key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.