Croda has perfect size for a quick deal...Orgnaic Growth interesting..helping the sentiment on valuation...see note from Credit Suisse today PT 3,200
CS : note attached.
Structural and Cyclical Tailwinds
■ We make minor earnings changes (<1%), retain our target price of
£32/share and reiterate our Outperform rating. We believe that Croda can
sustain the recent acceleration in organic growth supported by structural
and cyclical tailwinds. Importantly, these trends were reiterated during
our recent opportunity to spend time on the road with management.
■ Structural Tailwind: We believe the recent (above average) internal investment
in headcount (c500), infrastructure (capex 1.5x dep) and new product pipeline is
now yielding returns. Improving productivity, utilisation rates and product
launches should continue to drive growth 200-300bps above market. We
estimate this supports an average >5% EPS growth.
■ Cyclical Tailwinds: We estimate the growing market share of mid-tier personal
care customers (c50% rev) will help support innovation/formulation for Croda.
This should offset downtrading at branded multinationals (c20% rev) which
continue to push mass market (lower value) product. We forecast a net £10mn
EBIT benefit from oil and stabilising currency impact in 2015.
■ Shareholder Returns: We forecast robust cash flow generation (£130mn FCFF
2015E) after growth capex. This provides Croda the opportunity to return
>£150mn cash to shareholders while maintaining its new leverage target (1-1.5x
EBITDA) and optimal balance sheet gearing.
■ Room to rerate: Our warranted valuation for Croda is >15x EBITDA based on
our comparison of relative growth, returns and yield metrics to peers. We believe
Croda's product and formulation offering justifies a blended valuation of Specialty
Chemicals (10-12x) and HPC customers (18-20x). Above market growth and
sustained returns support a re-rating, in our view.
■ Valuation: Our TP is the average of our SOTP and DCF. Croda trades on a 9%
discount to its historical range vs peers.
