Croda International plc (CRDA) ORD GBP0.10609756

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Croda’s first-half sales grew by 7.3% to £856mn when ignoring currency movements. All divisions saw strong volume growth which more than offset some weakness in pricing.

Underlying operating profit was up by 11.9% to £147mn, helped by cost saving initiatives. Free cash flow dropped by 72% to £34.2mn, impacted by the timing of cash receipts and payments. Net debt was up from £508mn to £580mn.

Full-year pre-tax profit guidance of £265-£295mn remains unchanged.

Croda raised the interim dividend by 2% to 48p per share.

The shares were flat in early trading.

Our view

After a strong start to the year, trading conditions have become a little tougher for Croda. But sales growth for all divisions has remained positive into the second quarter and the group’s on track for a modest uplift in profits over the full year.

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 increasing focus on innovative niche products, with sales of New and Protected Products now at 35%.

Its nimbleness at bringing products to market, combined with a broad manufacturing footprint, facilitate R&D based relationships with local & regional (L&R) customers. These have more specialised end products which can enjoy higher growth rates.

This can also help Croda navigate trade restrictions and tariffs. In the US for example 70% of sales are manufactured there too. The direct risk’s been further managed so far through a tariff surcharge to customers. It’s the broader impact of tariffs on the global economy that could be a bigger threat, and while the prospect of an all-out trade war looks to have diminished, the longer-term impact of increases in import duties is yet to be assessed.

Looking ahead Croda’s well exposed to some attractive growth drivers. It’s well known for providing 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 which has weighed on sales. 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.

In consumer care, growing demand for more sustainable cosmetics, flavours and fragrances plays well to Croda’s strengths. However there remain pockets of weakness in certain markets. Croda’s not totally immune to economic conditions.

Robust cashflows and reasonable debt levels are other attractions. While cash generation did deteriorate in the first half, this was partly due to one-off factors and we’re hopeful that the group’s actions to improve cash management will pay off, which should help support the 4% yield. But there are no guarantees.

Up to now, Croda’s tentative recovery from cyclical challenges appeared to have been overshadowed by tariff concerns. But these fears look to have been overplayed, potentially marking an attractive entry point for exposure to a quality business with a focussed strategy. However, with economic headwinds still circling some downside risks remain.

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 Refinitiv. 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.

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