Croda International plc (CRDA) ORD GBP0.10609756

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Croda’s third quarter sales grew 6.5% to £425mn (5.9% expected), when ignoring currency movements.

Growth was led by the Consumer Care business which saw a rebound in Beauty Actives and strong double-digit gains in Flavours & Fragrances.

In Life Sciences, a continued recovery in Crop Protection more than offset weakness in sales to Pharmaceutical customers.

All regions contributed positively to sales growth, except Asia, where US trade tariffs weighed on performance.

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

The shares were up 3.9% in early trading.

Our view

Croda’s third-quarter sales performance provided further encouragement, and investors have reacted positively. With customers leaving buying decisions relatively late, management has taken a cautious approach and left the full-year outlook unchanged. However, if this momentum continues, we think there could be some upside to current guidance.

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 4.3% yield. But there are no guarantees.

So far, the market has been slow to recognise Croda’s strategic progress and the recovery in many of its end markets. But forecasts for 2025 and 2026 don’t look too demanding in our eyes. If the company can build investors’ confidence in the delivery of these numbers, there’s scope for the valuation to improve. However, given the ongoing economic and political uncertainties, there are bound to be some lingering doubts.

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.

While 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.

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.

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