Croda shares provide good chemistry for investors

Specialty chemicals group Croda has once again issued a statement that surprised on the upside. Questor say buy.

Croda
£18.81 +108p
Questor says BUY

Questor has been a supporter of the company for some time because of its niche business and good management. Whenever worries over the valuation emerge, the company tables a barnstorming financial performance – proving detractors wrong. The group's first-quarter update was no different and the shares were once again sent higher.

Croda manufactures chemicals used in personal care products, such as ingredients for Nivea sun cream and hair treatments, as well as chemicals for industrial applications and crop-care products. Importantly, the company owns the patents for several of its formulae.

The company's strategy is to focus on high-value ingredients, moving away from low-margin businesses – and there was more evidence of delivery in yesterday's statement.

The first quarter of this year started strongly. Total sales increased 13.2pc to £277.9m, despite currency headwinds equivalent to 2.4pc of revenue. Overall volumes were slightly down as the repositioning of industrial specialities continues.

More important than volumes, Croda is able to pass on rising prices of raw materials to its customers and average prices rose during the quarter. Management has implemented further price increases where necessary in April – the benefit of which will show in the group's next update. The company has what all businesses desire – real pricing power that it can use throughout the cycle.

This meant that not only was the quarter a record in terms of sales, but it was for margins, too. Its profit margins before interest and tax hit a record of 21.9pc.

Pre-tax profit from continuing operations rose a solid 40.2pc to £60.7m. Operating profits in consumer care rose 22.2pc to £42.4m and in its industrial business the cyclical recovery continues, with profits up 63.7pc to £18.5m.

Net debt fell by £5.3m since the year-end to £215.1m, so the balance sheet is strong.

Current trading continues to be very good and Croda said it had seen no impact on its business from the natural disasters in Japan.

The sector has seen some merger and acquisition activity of late. Warren Buffett's Berkshire Hathaway announced the acquisition of Lubrizol this year and BASF has bought Croda's main competitor, Cognis.

However, Mike Humphrey, Croda's chief executive, said he remains "picky" on acquisitions, although the company is always looking at targets.

The shares were first recommended on December 9, 2008, at 389¾p and are up 383pc since then, compared with the FTSE up 38pc. The shares were once again upgraded to a buy on February 24 this year at £15.88 and they are up 18pc since then. Material upgrades to consensus are likely after this statement.

Investors who bought in on the initial tip would have locked in a very attractive yield of 9pc.

The shares remain a buy, although after any share-price spike on good news, it may be best to wait and see if the shares edge lower before a purchase is made.