Morningstar | Croda Reports Soft 1H Results on U.S.-China Trade War Issues; Shares Overvalued
Narrow-moat Croda reported first-half EBIT of GBP 175 million, flat over 2018 and below consensus and our expectations. The United States-China trade war was the key driver of lower demand, particularly in personal care. The outlook for second-half 2019 will not assuage any concerns. Croda is now expecting a slight improvement in performance during second-half 2019 compared with the prior year, which doesn’t tally with consensus expectations for a 10% increase in EBIT. Shares are trading down 4% intraday in response. Despite weaker expectations for 2019, we don’t think anything reported in the first half has impaired the long-term outlook for the company. Consequently, we don’t expect to make a significant change to our GBX 4,300 fair value estimate. At current levels, the shares remain overvalued.Personal care struggled in the first half with EBIT down 5% over 2018 in constant currency. Weakness resided entirely in the U.S. and China, where sales declined 10%, as customers cut inventories because of the uncertain tariff situation. Croda expects the adverse effects to be short-lived. The innovation pipeline is strong and growth outside the U.S. and China remained positive in the first half.
Life Sciences was the standout performer in the first half, with EBIT up 19% in constant currency. Sales in health care rose 24%, including the Biosector acquisition, which closed at the end of 2018. Crop-care sales were up 4%, which is impressive given challenging agricultural markets, particularly in the U.S. owing to severe weather. Geographic expansion has helped. Sales doubled in Latin America over the first half.
Performance technologies reported an 11% drop in constant currency EBIT in the first half. Like it’s more diversified peers, Croda is not immune to the challenges in the autos market. This particularly hit the firm’s European and U.S. customers. Croda remains highly exposed to Europe in this segment, with about 45% of segment sales coming from the region.
Croda International creates, makes, and sells specialty chemicals. Co.'s sales, marketing and research activities are organized into four global market sectors: Personal Care, which focuses on ingredients for skin, hair, sun protection and color cosmetic products; Life Sciences, which comprises of three complementary businesses: Health Care, Crop Protection, and Seed Enhancement; Performance Technologies, which targets technologies in Smart Materials and Energy Technologies and continues to develop its presence in Home Care and Water Treatment; and Industrial Chemicals, which is a sector based on selling co-streams, developing niche industrial applications and undertaking toll processing.
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