Croda’s first quarter sales were up 9% to £442mn when ignoring currency movements. Higher volumes were the key driver, with revenue growth seen across all regions and sectors.
The company recognised the higher level of uncertainty brought about by tariffs, but continues to expect full year underlying pre-tax profit of £265mn to £295mn, helped by the strong start to the year. Croda’s local manufacturing and procurement model should offer some protection from tariffs, and the group intends to apply a tariff surcharge to clients to cover any incremental costs.
The shares rose 10.5% in early trading.
Our view
Croda has seen investor sentiment strengthen off the back of a strong first quarter and unchanged outlook. So far, the prospect of a reset to global trading rules has not derailed the company’s recovery from earlier cyclical issues.
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.
Croda’s also hoping to pass on the cost of tariffs to customers. Both technological know-how and complex supply chains make it difficult for customers to switch to a competitor. Passing on the costs can help protect margins, and here, there remain other levers to pull. Improving factory utilisation is one, cost savings are another. The company’s relatively wide geographic spread of customers is also a strength in this environment, meaning it’s not too exposed to one particular area.
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. This year, it’s expecting clinical trial usage to drive growth in these products. Key medical approvals could see a step up but that’s not something Croda can control.
In consumer care, growing demand for more sustainable cosmetics, flavours and fragrances plays well to Croda’s strengths. But if the impact of tariffs on global growth proves to be significant and lengthy, demand for end products in this division could still weaken.
Robust cashflows and reasonable debt levels are other attractions. After a period of considerable investment, the financial position could strengthen further, supporting the 4.1% dividend yield and leaving room for acquisitions. But there are no guarantees of either.
Up to now, Croda’s tentative recovery from cyclical challenges appeared to have been overshadowed by tariff concerns. But these fears look to have been overplayed, potentially marking an attractive entry point for exposure to a quality business with a focussed strategy. However, given the increasingly uncertain macro-economic environment, the downside risks remain elevated.
Croda International key facts
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