Croda hit by North American destocking

Chemicals group Croda International (CRDA) managed to grow its profits last year despite some fairly serious weakness in its consumer care business. The division’s organic sales growth for the second half of FY2022 was 2.4 per cent – falling short of analyst consensus estimates of 3.2 per cent.

The central issue was customer destocking, a trend that the company said was particularly apparent in North America. This followed strong demand for consumer care products in 2021, when customers with concerns about supply chain delays stockpiled substantially. 

Sales in Croda’s life sciences division – which were up 19 per cent to £682mn – went some way to offsetting the issues elsewhere. Growth in the segment was achieved despite an anticipated decline of roughly 40 per cent in sales of lipid systems used in Covid-19 vaccines. 

Management said crop protection was the “standout business” in life sciences and benefited from strong pricing for agricultural commodities. However, adjusted earnings before interest and tax (Ebit) margins for the full division were down 210 basis points due to the inherently lower margins for crop protection products. The situation was worse in consumer care, where adjusted Ebit margins fell by 590 basis points.

The company’s guidance for 2023 is not quantitative, although management said it’s currently “trading in line with expectations”. Helpfully, destocking in North America is expected to abate in the first half of this year. 

The shares still trade at an estimated 27 times consensus forward earnings for FY 2023, meaning Croda is hardly a bargain. We think there needs to be some margin improvement for this to look like fair value. Hold.

Last IC View: Hold, 7,306p, 29 July 2022