Croda International Plc

Croda International Plc (LON: CRDA) is an FTSE 100 index listed diversified chemicals company. It has four operating segments: Life Sciences, Consumer Care, Performance Technologies and Industrial Chemicals.

On 27 July 2021, CRDA would announce its H1 FY2021 results.

The last dividend of GBX 51.50 per share was paid on 4-June-2021 (final dividend).

Investment Rationale for Valuation – SELL at GBX 7,784.00

• The management could not provide detailed guidance for FY2021 due to a lack of visibility and macroeconomic uncertainty.
• During FY2020, CRDA’s basic EPS declined by 10.2% YoY.
• On the liquidity front, the quick ratio since FY2016 has been lower than the industry median of 1.29x.
• In the last year, the stock generated a decent return of about 41.76%, offering investors an opportunity to book a decent profit.
• The stock is trading very near its 52-week high price, raising doubt about its upside potential from the current level. Hence, a correction in the near term cannot be ruled out.

Key Risks

• The acquisition of Parfex may not bring the desired synergy, increasing costs and affecting margins for CRDA.
• Due to the payment of dividends, there could be stress on CRDA’s liquidity.
• Due to its international operations, fluctuations in exchange rates could affect the profitability and balance sheet position of the Company.

Financial Highlights (for the year ended 31 December 2020 (FY2020) as of 2 March 2021)

(Source: Company Website)

• Driven by the strength of product portfolio, international footprint and customer intimacy, revenue in FY2020 was up 0.9% YoY.
• However, there was an increase in costs due to the impact of acquisitions. It led to operating profit down 9.3% YoY and basic EPS declining 10.2% YoY in FY2020.
• The Company generated robust adjusted free cash flow of £176.9 million. However, the adjusted free cash flow declined 12.3% YoY in FY2020.
• The robust cash flow led to management offering an increase of 1.1% in dividend per share in FY2020.

One Year Share Price Chart

(Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative) 

Conclusion

There are continuing macro uncertainties in FY2021 with potential disruptions in the supply chain. Also, the delta plus Covid-19 variant could pose further restrictions. The management could not provide detailed guidance for FY2021.  Meanwhile, the stock is trading very close to the 52-week high of GBX 7,794.00. The stock made a 52-week low and high of GBX 5,366.00 and GBX 7,794.00, respectively. 

Considering the potential disruption in the supply chain, lower liquidity profile of the Company than the industry, lack of detailed guidance from the management, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Croda International Plc at the closing market price of GBX 7,784.00 (as of 13 July 2021), while we will revisit our stance based on the improvement in profitability of the Company. 

Victrex Plc

Victrex Plc (LON: VCT) is an FTSE 250 index listed speciality chemicals company. Its operations encompass the manufacturing and sale of various polymers. It is an innovative world leader in polymer solutions.

The last dividend of GBX 13.42 per share was paid on 30-June-2021 (interim dividend).

Investment Rationale for Valuation – SELL at GBX 2,706.00

• As per the management, there could be increasing raw material inflation and a growing impact from foreign currency headwinds in FY2022.
• Due to the macroeconomic uncertainty, the management is yet to provide detailed guidance for FY2022.
• In the last year, the stock generated a decent return of about 37.86%. Hence, it is an opportunity for investors to book a decent profit.
• The stock is trading near its 52-week high price. Hence, there is doubt about its upside potential from the current level. Also, a correction in the near term cannot be ruled out.

Key Risks

• There could further disruptions in the supply chain, increasing costs and affecting margins for the Company.
• Delta variant of Covid-19 could lead to reduced customer demand from the end markets, affecting the top-line of VCT.
• Dividend payments could put stress on VCT’s liquidity position.

Q3 FY2021 Interim Management Statement (released on 9 July 2021)

• Driven by lower Covid-19 related impacts on end markets, revenue in Q3 FY2021 was up 37% YoY, and sales volume in Q3 FY2021 rose 49% YoY.
• Electronics, Other Industrial and Value Added Reseller end markets contributed to the most of these volume and revenue growths in Q3 FY2021.
• The Company has a strong pipeline of 'mega-programmes', which could help in achieving specific milestones.
• The Company has a highly cash generative business model, which supports high capital expenditure and dividend payment for the Company.

One Year Share Price Chart

(Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

There could be potential foreign exchange headwinds as per the management. Also, pandemic related challenges have not disappeared yet.  Hence, it would be prudent to liquidate the position at a profit as the stock is also trading near its 52-week high, indicating overstretched valuation. Overall, we do not have significant catalysts to support an uptick in the stock price and recommend exiting the position currently. The stock made a 52-week low and high of GBX 1,798.00 and GBX 2,720.00, respectively.

Considering the continued economic and market uncertainty, lack of detailed guidance from the management, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Victrex Plc at the closing market price of GBX 2,706.00 (as of 13 July 2021) while we will revisit our stance based on further corporate announcements by the Company.

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

*Dividend Yield may vary as per the stock price movement.

Disclaimer

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