Croda International PLC

Established in 1925, Croda International PLC (LON: CRDA) is an FTSE 100 listed entity that develops specialty chemicals.

On 29 July 2022, Croda expects to release its H1 FY22 results.

Investment Highlights – BUY at GBX 6,474.00

• AGM Trading Update: On 20 May 2022, Croda affirmed that trading in FY22 has been strong as it continued to recover the cost inflation through sales and profit growth, and thus, FY22 guidance remained unchanged.
• Decent Fundamentals and Outlook: Croda demonstrated excellent performance in FY21, reflecting accelerated strategic implementation. It has bright outlook prospects underpinned by significant capital investments, a recent acquisition, building of Life Sciences platform, increase dividends, and demand recovery in Performance Technologies.
• Government Grant: On 31 March 2022, Croda announced that the UK government has awarded it a grant worth £15.9 million, to expand its manufacturing facility in Leek, Staffordshire. It would help the Company in developing next generation nucleic acid drugs such as mRNA vaccines.
• Disposal Benefits: On 22 December 2021, Croda signed an agreement to sell most of its Performance Technologies and Industrial Chemicals businesses for an enterprise value of €915 million on a cash-free, debt-free basis. It would help in generating a stronger profit margin in the future.
• Positive Technical Stance: From a technical standpoint, 14-day RSI (35.69) is in the oversold position, while the stock price has gone below the lower Bollinger Band.
• Undervalued Multiples: On a forward 12-month basis – key trading multiples (EV/Sales, Price/Cash Flow, and Price/Book) are lower than the average of the Chemicals sector.

Key Risks

• Macroeconomic Uncertainties: The US dollar hitting two-decade peaks, persistent inflation, and subdued economic forecasts can continue to impact corporate profits and put pressure on equity markets.
• Federal Reserve Rate Hike: The Federal Reserve announced an 0.5% increase in interest rates on 04 May 2022. Meanwhile, the Bank of England had made a fourth consecutive interest rate hike on 05 May 2022. It may adversely impact the global equities.

Financial Highlights (for the year ended 31 December 2021, as of 1 March 2022)

 (Source: Company Filings)

• Financial Growth: All businesses performed ahead of pre-pandemic levels in FY21, and therefore, full-year ordinary dividend increased by 10% YoY.
• Operational Achievements: Its planned strategic transition to pure-play Consumer Care and Life Sciences entity accelerated with an organic capital investment of around £160 million.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative)

*Peers: Treatt PLC, Zotefoams PLC, and Heiq PLC.

*All selected peers are LSE-listed Companies from the Chemicals sector.

Conclusion

The synergy benefits from acquisitions contributed £58 million in additional operating profit in FY21. Moreover, the growth is expected to continue in FY22, supported by robust consumer demand, inflation cost recovery, and the benefit of its recent investments.

Based on the robust new business, strong underlying profitability, encouraging wealth market outlook, favorable industry trends, and valuation conducted above, we have given a “BUY” recommendation on Croda International PLC at the closing price of GBX 6,474.00 (as of 9 June 2022), with lower double-digit upside potential based on 29.73x Price/NTM Earnings (approx.) on FY22E Earnings Per Share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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