Croda’s earnings drop in line with expectations

Investors rarely respond well to an objectively lacklustre company update. Croda International’s (CRDA) half-year results – which showed substantial declines in both revenue and pre-tax profit – proved to be something of an exception. The company’s shares rose by nearly 5 per cent on the morning the figures were released. 

This unexpected boost was probably driven by relief that the situation wasn’t more dire than it turned out to be. Just last month the company issued a profit warning that was driven in large part by a pattern of destocking across its consumer care business. Of Croda’s three operating divisions – life sciences, industrial specialties and consumer care – only the latter saw a sales uplift in the first half. And even this was only modest (from just under £455mn to closer to £456mn).

Life sciences revenue fell by 8 per cent, with the comparable period last year benefiting from $62mn (£48mn) in lipid sales to Covid vaccine manufacturers. However, management expects the impact of this drop-off to be short-lived given advances in medical technology.

“The move to biologics is the major technology trend with new mRNA vaccines expected to come to the market in the next two years, helping to drive accelerated growth in our pharma business from 2025,” the company predicted. 

Croda is pinning much of its growth hopes on the pharmaceutical market, where it hopes to be sourcing £1bn in annual revenue by 2030. To date, it has mostly worked with patent-holding companies, though the board is hoping to start supplying more generic drug manufacturers in time. It reportedly has its eye on the lucrative orphan (meaning rare) disease market. 

At the end of June 2022, the company completed the divestment of most of its performance technologies and industrial chemicals business. The assets that remain are now grouped under the industrial specialties banner – but the company has admitted this area is not a “priority for capital allocation and strategic growth”. 

Given the dividend has been maintained, it’s reasonable to conclude that management thinks destocking won’t keep Croda down in the long run. The broker consensus, according to FactSet, puts the company’s forward price-to-earnings multiple at 26 times, which looks pretty steep in light of recent difficulties. We’re content to sit tight (unless earnings forecasts are revised downward again). Hold.

Last IC View: Hold, 6,696p, 28 February 2023