Morningstar | Momentum Shifts Down in 2H for Croda, but Trends Remain Solid; Shares Overvalued
Narrow-moat Croda reported second-half EBIT of GBP 164 million, up 5% over 2017 and in line with consensus but slightly lower than our expectations. The shares traded down after the report as it appears the market was hoping for more growth. Second-half constant-currency growth in the core business was 2.8%, a downward shift from the strong 4.7% growth posted in the first half. Croda doesn’t really do guidance, so commentary on the outlook for 2019 was limited to "further progress." Our current estimates call for a 7% increase in EBIT in 2019, which we don’t expect to change materially, nor do we expect a significant move in our GBX 4,000 fair value estimate. At current levels, the shares look overvalued.Personal care remained the strongest segment with 4.1% constant-currency growth in the second half and a 32% EBIT margin. Its leading beauty actives business continued to drive results, with high-single-digit growth for the full year. New and protected products increased again to a record 43% in 2018 from 41% in 2017. The company’s new biosurfactant plant has been shut down due to a leak. The restart is not expected until mid-2019, and until that time, carrying costs of GBP 2 million per quarter will have to be absorbed.
Life sciences is also performing well and has now replaced the sales from the active pharmaceutical ingredients contract that was exited in December 2017. In the second half, constant-currency sales growth was 3.3%, still weighed down by the loss of API sales. The integration of Incotec has gone better than our expectations, with profits now doubled since the acquisition three years ago. High-purity excipients remains the most exciting technology in this segment, with 30% annual growth in 2018.
Performance technologies is making good progress towards its 20% EBIT margin target as low-margin products are exited. For the full year, the EBIT margin increased 220 basis points to 18.7%, 40 basis points higher than our forecast.
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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