Morningstar | Solid Growth Continues for Croda in 3Q; Shares Overvalued
We are maintaining our GBX 4,000 fair value estimate for narrow-moat Croda after reviewing the third-quarter trading update. At current levels, the shares look overvalued. Constant currency sales growth was 3.4% for the group and 4.5% in the core business, led by the life sciences segment. This is tracking in line with our expectations for the year. Sales for new, patented, or protected products, or NPP, reached 28.4%. Margins were reported to be slightly ahead of 2017 on a year-to-date basis.Personal care continued to be strong with 4.9% constant currency sales growth in the third quarter over 2017. Demand was healthy across the business lines with active beauty leading the charge. NPP sales reached record levels. The new biosurfactant plant in North America was successfully commissioned in the third quarter. This bodes well for future growth given increasing consumer demand for sustainable products.
Constant currency sales growth in life sciences was 8.5%, or 9.3% excluding the API contract, which is winding down. Growth was driven by the company’s high-purity excipients as sales in crop protection moderated in the third quarter. Incotec, the recently acquired seed enhancement business, continued to grow with recent investment to improve facilities in Europe and China.
Volumes declined in performance technologies as Croda continues to de-market lower margin products. As a result, constant currency sales growth was only 1.4% in the third quarter. NPP sales were reported to have increased, which is supportive of our view for increasing margins over the medium term.
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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