After peaking in late 2021 at 10,000p the Croda (LSE: CRDA) share price has been in freefall and now trades at a 10-year low. During the peak of the pandemic, as governments and pharmaceutical companies raced to find a vaccine, the company profited handsomely from sales of high-margin lipids. By 2024, sales had completely dried up.
H1 results
The company reported a mix set of results today, 29 July. Sales rose 7% to £855m and adjusted operating profit was up 12%. However, free cash flow plummeted 73% to £34m. Driving a large part of this decline was poor inventory management and poor cash collection from its debtors.
Over the last five years, the company has invested heavily through acquisitions and building out its pharmaceutical capabilities. However, many of these investments have not translated into improvements in profitability.
Now that its capital expenditure programme is behind it, costs should begin to fall. If the company can add value from these acquisitions, then that increases the likelihood of a turnaround in the stock.
Market fragmentation
One area where the company has the potential for future profit relates to increasing fragmentation across its key markets.
In its beauty division, local and regional customers have been very successful in taking market share from established players like L’Oréal and Estée Lauder, in the highly valued hair and skin market. This has been good for Croda because average selling prices for key ingredients supplied to niche players is significantly higher.
Small players rely on speed-to-market and innovation in order to compete. This provides the company with excellent up-selling opportunities through its formulation expertise.
Fragmentation also continues across its crop protection business. There, the company saw a 7% increase in sales to businesses outside of the traditional big four producers of fertilisers and crop nutrients. Less concentration in its customer base can only be good in my books.
Long-term potential
Croda is a relatively small player in the chemicals sector, which is dominated by multinationals like BASF and Evonik Industries. But continued fragmentation plays to its strengths, and coupled with structural growth drivers, I’m sensing an opportunity here.
Significant shifts across consumer care, pharmaceuticals, and agriculture are already evident today and are likely to accelerate in the future.
The rise of AI, coupled with advances in biotechnology and demand for more sustainable ingredients will fundamentally alter the entire value chain of the chemicals industries.
Innovation in product development will be a core driver of future profitability. The company is already at the forefront of growth in new and protected products (NPP). It possesses over 1,700 patents.
In 2025, it expects the number of NPPs to be higher than in 2024. This includes the likes of Luceane, a ground-breaking anti-ageing ingredient.
When I look back, it was obvious that Croda’s share price had become completely detached from its underlying fundamentals after Covid. That is no longer the case now.
Despite a splurge in capital expenditure, net debt to adjusted earnings before income tax, depreciation and amortisation (EBITDA) remains at only 1.4 times. On top of that, it offers a 4.1% dividend yield. As the company marks its centenary anniversary, it’s certainly one on my watchlist.
