Acquisition Of Solus Biotech And Asian Expansion Will Strengthen Future Outlook

Key Takeaways

• Strengthening local relationships and strategic acquisitions, particularly in Asia, should drive revenue through higher prices and increased manufacturing capacity.
  
• Targeting innovation and operational efficiencies, with a focus on mRNA products, positions Croda for growth in both consumer and pharma markets.
  
• The company faces declining sales and margin challenges, compounded by market fragmentation, underutilization, and cost inflation outpacing revenue growth, impacting future earnings.

Catalysts

Engages in the consumer care, life science, and industrial specialty businesses in in Europe, the Middle East, Africa, North America, Asia, and Latin America.

• Croda's focus on strengthening relationships with local and regional customers, particularly in emerging markets like Asia, is expected to drive growth due to higher average selling prices and a shift in their customer base. This should positively impact revenue.
  
• The company's proactive innovation strategy, including increased R&D intensity and a pipeline rejuvenation, aims to meet renewed customer demand for innovative products, which should enhance sales volume and contribute to revenue growth.
  
• Strategic investments, such as the acquisition of Solus Biotech and increased manufacturing capacity in fast-growing countries, are expected to drive future returns by leveraging recent capacity expansion, ultimately impacting earnings positively.
  
• Croda is targeting operational efficiencies and greater utilization of shared manufacturing sites to improve margins, aiming for a low 20s operating margin driven by higher sales volumes, which will have a favorable impact on net margins.
  
• The company's commitment to unlocking value from new mRNA-related pharmaceutical products and leveraging partnerships with major biopharma companies positions it for growth in the pharma sector, enhancing future revenue and profit opportunities.

Croda International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Croda International's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.7% today to 13.7% in 3 years time.
• Analysts expect earnings to reach £262.5 million (and earnings per share of £1.89) by about March 2028, up from £158.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.6x on those 2028 earnings, down from 29.1x today. This future PE is greater than the current PE for the GB Chemicals industry at 16.9x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.5%, as per the Simply Wall St company report.

Croda International Future Earnings Per Share Growth

Risks

• Sales growth was weaker than anticipated, and there are challenges in market fragmentation that may continue to impact revenue by affecting the customer base and order volumes.
  
• The adjusted operating margin decreased partly due to the reduced sales of high-margin COVID lipids, indicating challenges in maintaining margins without such extraordinary sales.
  
• There was a decline in sales in the Life Sciences segment, driven partially by challenging market conditions in consumer health and veterinary markets in Europe, which could pressure future earnings.
  
• The company is facing inefficient utilization which could drag on margins if volumes do not recover as expected, potentially impacting earnings and profitability.
  
• The business faces cost base inflation outpacing revenue growth, indicating potential challenges in maintaining net margins if costs continue to rise.

Valuation

• The analysts have a consensus price target of £41.723 for Croda International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £52.0, and the most bearish reporting a price target of just £35.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £1.9 billion, earnings will come to £262.5 million, and it would be trading on a PE ratio of 27.6x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of £33.04, the analyst price target of £41.72 is 20.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.