Personal Care growth not broken, just misunderstood; reiterate Buy
* Source of opportunity
Given investor concerns over Personal Care and Croda’s market position,
we dig deeper to understand whether Croda is losing share. Our analysis
suggests it has not lost high-value, high-margin market share (as seen in solid
1H new and protected products (NPP) growth) although there is some
competition in the low value tail which continues to be ceded. Weak organic
growth coincides with a soft personal care market rather than any structural
issue. Moreover, our channel checks with customers/peers in emerging
markets suggest Croda is making inroads as local players seek to compete
against large multinational companies. We reiterate our Buy rating.
* Catalyst
Croda will report 3Q results on November 6. Given a number of consensus
revenue/EBIT downgrades over the past few quarters, the delivery of results
in line with guidance along with any indication of improvement in organic
growth should be taken well and allow the stock to re-rate. Beyond this,
product launches and the commencement of the manufacture of generic
Lovaza (pharma grade Omega 3) by Par Pharmaceutical (Croda’s
manufacturing partner) should provide reassurance that Croda is on track
and delivering. Finally, we believe the company’s capital allocation policy
could be revisited given its strong cash generation, potential absence of
pension top-ups and lack of meaningful M&A, providing scope to return
cash to shareholders through a buyback/special dividend.
* Valuation
Croda trades at 15x 2016E P/E (slightly below its historical average) and 9x
EV/EBITDA (vs. an historical average of 10x). At this level, we find the
valuation attractive given Croda’s strong return on capital, and reiterate our
Buy rating. We still see Croda as a strategic asset as EU chemical
companies seek to move downstream. Our 12-month price target of 2750p,
based on 11.5x 2016E EV/EBITDA, is unchanged.
* Key risks
Inability to pass on raw material price increases and weak demand.