EUR 850.00 For Business Accounts Only

Morningstar | Croda’s 1H Reveals Impressive Margin Improvement in Performance Technologies; Shares Overvalued

Narrow-moat Croda reported first-half results that were broadly in line with our expectations. Adjusted operating profit was GBP 179 million, up 6% in constant currencies over the prior-year period. We are impressed with the margin improvement in the performance technologies segment. In the first half, operating margin in the segment reached 19.3% due to demarketing low-value products, primarily for the oil and gas market. As a result, performance technologies adjusted operating profit in constant currencies was up 15.2% over 2017, despite volumes shrinking 9%. We previously expected performance technologies margins to reach 20% by the end of our forecast. Given progress to date, we will accelerate our assumptions around margin improvement, which will likely increase our GBX 3,800 fair value estimate by around 5%. At current levels, we think the shares are overvalued.

Personal care reported very strong sales growth of 9.3% in constant currencies over the first half of 2017. Growth was led by beauty actives, which recorded a double-digit increase in sales. We wouldn’t expect the pace of growth to be maintained in the back half of 2018, but the segment is on track for another stellar year. New, patented, and protected sales reached 42% of segment revenue.

Life sciences was the weakest performer in the first half, with sales and adjusted operating profit increasing roughly 2% over 2017. However, the exit of the omega-3 API contract in 2017 is masking healthy underlying results. Excluding the API contract, constant-currency sales in life sciences increased 7.4% over 2017. In addition, the Incotec integration is on track to achieve the target of 20% operating margins within three years of acquisition.