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(Sharecast News) - Jefferies downgraded Croda on Tuesday to 'hold' from 'buy' and cut the price target to 3,000p from 3,100p.
The bank said that operationally, into 2026 the key question remains the incremental earnings contribution margin Croda's volume growth generates.
"This question is seemingly not going to be resolved until the end of 2026, with volumes once again needing to be prioritised to restore group utilization rates," it said. "With multiple peers highlighting consumer chemicals competitive/pricing pressure, it suggests now is not a favourable time to be adding volumes into the market."
Jefferies said what is also interesting surrounds the variability of its top-line growth across different regions and end markets.
"Historically, this has proven a good portfolio hedge (different cycles across different end markets) until 2022/3/4, where it showed the importance of operating leverage to volumes (in particular across its shared services).
"However, it also suggests whilst the volume priority ensures OSG ahead of peers into 2026, the path to operating margin improvement is likely to be more moderate."
Jefferies noted that peer commentary surrounding pricing/margin pressure in lower end-consumer chemicals volumes is unlikely to assist.
"This drives our EBITDA to be mid single digit below consensus throughout the forecast period (JEFest EBITDA margins up 60bps pa in FY26/7 versus consensus 120bps pa)," it said.
It said converting customers to a more premium product mix is likely to be reliant on end-market growth and a change in customer attitudes towards embracing innovation/new product launches. "Both appear challenging given current macro uncertainty."
Jefferies pointed out that financially, Croda is entering a mode of greater focus on cost and improving returns as the company transitions away from peak capex and a higher free cash flow conversion mode.
"Given cost savings/restructuring still represent a meaningful contributor to its operating margin recovery, it suggests cash outflow for restructuring will still be a persistent overhang for some time.
"However, showing a greater willingness to take action through cost and capex containment are steps in the right direction. The greatest challenge for investors surrounds Croda's ability to deliver on sustainable top-line growth and margin growth/stability through cycle."
Jefferies said that like Symrise, Croda faces the "delicate" balance of addressing the cost base while attempting to sustain topline momentum.
At 0930 GMT, the shares were down 4.2% at 2,664.24p.