Founded in 1925, Croda International PLC (LSE:CRDA, Financial) (COIHF, Financial) produces ingredients for various industries, including consumer cosmetics, pharmaceuticals and agriculture. The company sells its products to manufacturers who use them for their own products. In short, the company is a diversified chemicals business, one of the largest in Europe.
Croda International operates in three lines: Consumer Care, Life Sciences and Industrial Specialties.
Under Consumer Care, the company manufactures ingredients for cosmetics and care products, such as extracts of berries, fruits and flowers, as well as synthesized compounds with beauty applications. It also produces ingredients for cleaning solutions, fragrances and chemicals that protect biopolymers. Croda Pharma, another line, produces high-purity materials used in the manufacture of drugs. In the Crop Protection and seed enhancement segments, it uses biostimulant chemistry to increase crop quality, yield and shelf life. It also partners with Cambridge University spin out Xampla to develop biodegradable, microplastic-free seed coatings.
Croda's Industrial Specialties segment focuses on manufacturing industrial-grade chemicals and was formed after the acquisition by Cargill of Croda's legacy industrial chemicals business. Cargill is now a strategic partner for this segment, which generated 509.20 million pounds ($633.34 million), or 24.4%, of the company's annual revenue.
In terms of corporate strategy, Croda emphasizes innovation and sustainability. It has made progress toward sustainability by increasing its internal carbon price from $68 to $154 per tonne of carbon dioxide equivalent. The company's "Land Positive Commitment" outlines goals to be achieved by 2030, including the use of 100% sustainable palm oil, zero deforestation and peat-free, working with Action for Sustainable Derivatives to restore forests and developing technologies to allow customers to eliminate microplastics in agricultural seed treatment.
Croda also invests heavily in research and development, with total R&D costs of $82.3 million in 2022, accounting for approximately 3% of revenue.
Financial review
Croda International achieved a satisfactory performance in 2022, with an 11% increase in both sales and adjusted profit before tax.
In 2022, the Consumer Care segment's operating margin was 22.8%, while Life Sciences' was 33.6%.
For the year, the Consumer Care division achieved record sales and adjusted operating profit, recovering from input cost inflation and supply chain disruptions. The strongest sales growth was observed in the Beauty Care category, driven by robust pricing, increased demand from multinational customers and the shift toward sustainable ingredients. However, the volume for the full year declined 12%, mainly due to the destocking that occurred among customers and the retail supply chain because of high demand in 2021. The second reason for the lower volume was the selective demarketing of lower-margin products due to capacity constraints in some factories.
The Life Sciences business achieved 19% sales growth and 10% higher adjusted operating profit, despite a reduction in Covid-19 vaccine demand. Crop protection was the standout component, benefitting from strong agricultural commodity pricing and high demand.
Croda International witnessed satisfactory sales growth across most regions. The Asia region saw a record year despite modest growth in China. Western Europe experienced sufficient demand despite higher prices, while Latin America also saw growth with the crop sector leading the way. However, the closure of Russia had a negative impact on sales in Eastern Europe and North America was impacted by destocking and lower demand caused by the pandemic.
Croda will announce its half-year 2023 results on July 25.
ESG initiatives
Croda International has identified three global areas where it believes it can have a significant impact on the planet and society. By 2030, it hopes to be what it calls "Climate, Land and People Positive."
Since 2018, it has managed to reduce its Scope 1 and 2 emissions by 20%. The Croda Foundation has also allocated $1.25 million of funding to 13 projects, ultimately benefiting around 15 million people. However, in 2018, the company faced a lawsuit relating to the discharge of ethylene oxide, a carcinogen, from one of its chemical plants in Delaware into the surrounding area. Despite the outcome being in its favor, this incident contradicts its claims of being land and people positive.
Comparison with Treatt
Yesterday, I discussed Treatt PLC (LSE:TET, Financial). Croda International can be considered one of its indirect competitors as they operate in the same industry but focus on different areas.
Treatt produces natural and synthetic ingredients for the consumer beverage industry, while Croda International focuses on developing chemicals for the agricultural and consumer care industry.
Valuation
The GF Value Line suggests the stock is modestly undervalued based on its historical ratios, past financial performance and analysts' future earnings projections.
Croda also has a GF Score of 94 out of 100, which indicates good outperformance potential. With strong ratings for profitability, value, growth and financial strength, it is let down only by momentum.
Another measure of value is the Piotroski F-Score, where it ranks decently at 7 out of 9. It also has a robust Altman Z-Score of 7.02.
Conclusion
To align with current trends, Croda International has refocused its business strategy by concentrating on high-value niches within the consumer care and life science sectors. This shift has resulted in a stronger margin, higher returns and a less cyclical and lower carbon-intensive business model. Furthermore, the vaccine component of the business is promising with 100 nucleic acid drugs in development, including the first human trial of gene therapy, which is a potential high growth area.
As a result, Croda International anticipates achieving more consistent growth and increased margins going forward, likely leading to superior returns in the future.
