Rising Regulation Will Threaten Specialty Chemicals Though Tailwinds Remain

Key Takeaways

• Regulatory pressures and bans threaten revenue growth, while delays adapting to sustainability and ESG expectations could erode price premiums and reputation.
  
• Investments in new capacity risk underutilization amid slower life sciences demand, with prolonged innovation cycles and supply chain volatility adding to margin uncertainty.
  
• Strategic focus on sustainability, specialty products, emerging markets, and operational efficiencies is set to drive diversified growth, stronger margins, and increased profitability.

Catalysts

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

• Croda International's future revenue growth is threatened by increasing regulatory scrutiny and potential bans on key ingredients, especially in the EU and North America, which are likely to raise compliance costs and restrict product offerings for specialty chemicals, ultimately limiting revenue expansion.
  
• Although Croda highlights the global shift towards sustainability, its transition towards greener portfolios could lag behind more agile or focused competitors; if this happens, failure to meet tightening ESG expectations may lead to customer losses, reputational risks, and eroded price premiums, undermining long-term margin improvement.
  
• The company's ambitious investments in life sciences and new capacity-such as the Lamar facility in the US and Solus in Korea-risk under-utilization, as pharmaceutical and biopharmaceutical markets face slower regulatory approvals and funding bottlenecks, which is likely to create excess capacity, asset impairments, and depressed returns on capital employed.
  
• Heavy reliance on innovating new specialty ingredients places sustained pressure on R&D costs; should commercialization of new products, such as biobased actives and advanced excipients, continue to face elongated timelines or underperform in adoption, both net margins and earnings growth could disappoint relative to expectations.
  
• Potential deglobalization and rising trade barriers, combined with persistent volatility in raw material prices, threaten Croda's ability to optimize its supply chain and capture expected growth in emerging markets, increasing input costs, destabilizing gross margins, and making future earnings less predictable.

Croda International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Croda International compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Croda International's revenue will grow by 1.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.4% today to 12.7% in 3 years time.
• The bearish analysts expect earnings to reach £224.0 million (and earnings per share of £1.6) by about August 2028, up from £139.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.0x on those 2028 earnings, down from 25.6x today. This future PE is lower than the current PE for the GB Chemicals industry at 22.1x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.77%, as per the Simply Wall St company report.

Croda International Future Earnings Per Share Growth

Risks

• Strong secular tailwinds such as global shifts toward sustainability, bio-based chemicals, and green chemistry are accelerating demand for Croda's specialty ingredient portfolio, which should support volume growth and underpin premium pricing over the coming years, benefiting revenues and net margins.
  
• Rising demand in emerging markets-particularly in Asia and Latin America where Croda is investing in local plants and capabilities-will expand its addressable market, enabling further sales growth, diversification of customer base, and enhanced earnings stability.
  
• Ongoing portfolio optimization with a strategic shift toward higher-margin, specialty product lines in Life Sciences and Consumer Care, as well as targeted divestments, is set to boost operating margins and return on capital employed, strengthening overall profitability.
  
• Execution of a comprehensive transformation and cost efficiency program, including doubling of targeted annualized savings to £100 million by 2027, is expected to drive significant improvement in operating margin and free cash flow, bolstering near
• and long-term earnings.
  
• Rapid innovation cycles in beauty, pharma, and crop protection-coupled with Croda's active R&D, proprietary manufacturing processes, and successful commercialization of new actives-position the business to capture greater market share and pricing power, supporting sustained revenue and profit growth over time.

Valuation

• The assumed bearish price target for Croda International is £23.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Croda International's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 £23.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £1.8 billion, earnings will come to £224.0 million, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of £25.69, the bearish analyst price target of £23.0 is 11.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.