Croda looks resilient

Nevertheless, the chemicals company looks well placed to make it through the Coronavirus crisis. It has access to cash and it has shown itself to be resilient thanks to a focus on innovation and growth markets. Indeed, even in the face of last year's tough trading conditions, margins held firm at 24.7 per cent and a drop in capital spending helped free cash flow jump from £155m to £202m. The longer-term record on margins and cash conversion also points to the reliability of the business (see graph).

Looking at Croda more broadly, it’s hard to argue with two of its key sales drivers: ageing and vanity. Mr Foots picked these two forces as providing demand for the company’s products, alongside the wellbeing trend and “self-medication” at last year’s presentation to investors and analysts.

Croda’s personal care division is its largest, accounting for 35 per cent of sales. The struggles of CoverGirl owner Coty (US:COTY) to offload brands and the new dominance of the cosmetics industry by celebrities such as Rihanna and Kylie shows being a supplier to manufacturers, as Croda is, is a safer place to be right now than being a brand owner. 

All the same, the division has faced challenges, with sales down 3 per cent last year. What's more, with hair and beauty salons shuttered all over the world and lockdown erasing many people’s need for cosmetics, Covid-19 will not make life any easier. So far, Croda has provided limited detail on trading. However, the group should benefit from its attempts to target growth areas such as ingredients for sustainable products and bio-active ingredients. For example, while reporting an overall 4.3 per cent quarterly decline in sales, French cosmetics giant L’Oreal (Fra:OR) pointed to 11.5 per cent like-for-like growth in its ‘active cosmetics’ division. 

Croda's performance technology division, which accounted for 31 per cent of last year's sales, also faces challenges. In 2019, the division reported a 7.3 per cent drop in revenue. Croda highlighted the weaker German carmakers as a key reason for this, after production overall fell 10 per cent on the year before. Parts maker Bosch has said it expects a 20 per cent drop in production in Germany this year, so this point of weakness is likely to get worse for Croda, despite its move to shift the division’s focus from Europe to emerging markets. However, in this division the group also has its sights set on growth opportunities, such as additives to make clothing last longer and lubricants for wind turbines.

Croda's best placed division appears to be life sciences, which generates 25 per cent of group revenue selling to customers in the pharmaceuticals, food and crop sciences sectors. 

While Croda faces some clear headwinds this year, the diversity of its operations and its historical ability to protect margins suggest it is in a good position to weather the storm. When the group updated the market late last month, it said demand had remained solid, with customers primarily focused on using it to secure their supply chains. Meanwhile, the group had undrawn, committed facilities of £457m, along with £91m cash.