Shares in Croda surge on back of results

Shares surged 8.4 per cent to 1,272p as the East Yorkshire-based group said it expected to make further profit progress in the year.

The group posted pre-tax profits of 96.2m from continuing operations for the six months to the end of June, compared with 46.3m a year ago.

Sales from continuing operations were up 27.6 per cent on a year

earlier to 516.1m.

Chief executive Mike Humphrey said while the group was close to becoming a 1bn turnover company, he was more focused on profitability.

"We had a bit of a blip during the recession but we've stuck to the same story," said Mr Humphrey. "People do not forget about vanity during a recession. They are still vain.

"We never saw the (expected) level of trading down during the recession. There was some effect in the top end, mainly in perfume."

Croda, based in Snaith near Goole, supplies ingredients to skin care and cosmetics companies such as L'Oreal, Chanel, Clarins, Estee Lauder, Boots and Procter and Gamble.

Both its consumer care and industrial specialities divisions reported record growth during the six months. Consumer profits gained 35 per cent to 71.2m and sales rose 13.7 per cent to 264.3m.

A year ago its industrial arm, which supplies chemicals used in plastics and coatings used right across the manufacturing sector, reported "massive destocking".

But this has largely worked through the system, and industrial sales were up 46.3 per cent to 251.8m with operating profits leaping to 29.6m from just over breakeven.

However, Croda said while industrial was back on track, "there is little evidence of an expansion in finished product stock levels".

"I don't think we will see that kind of restocking for some time because people have learned their lesson," said Mr Humphrey. "Pre-2008 people thought the growth would go on forever; it got very frothy."

It only has six to eight weeks' visibility on its order books, so he said it was hard to predict whether the first half's strong trading would continue.

"If there is a double dip we can cope with it," said Mr Humphrey. "We are lean enough to cope with any situation. Croda will continue to grow its profits and its sales through all of these bad runs."

The group expects sales volumes in the second half to be weaker than the first, mainly due to customers shutting down sites for holidays.

Mr Humphrey said the group was considering acquisitions, and could buy to increase its penetration in emerging markets.

"We do not buy for size," he said. "We only buy companies that bring us new technology or new customer bases. We've only made three acquisitions in 12 or 13 years – we're really boring. We only focus on markets that have growth."

Net debt fell to 269.7m, and its underlying earnings to net debt ratio was well within covenant levels. If this ratio improves significantly, Mr Humphrey said the group would likely use excess cash to buy shares back into treasury.

The group lifted its dividend by 50 per cent to 9.75p a share.

WH Ireland lifted its target price to 1,450p from 1,200p. "(WH Ireland) estimates were close to consensus for the half year but these and even the top-of-the-range expectations were left trailing," said the stockbroker in a note. Despite the share price gains, we believe that there is still more to come and consequently we retain our 'outperform' recommendation."

Restructuring nearing end

Croda sold its non-core German subsidiary for 52m earlier this month, largely completing its restructuring programme following the 2006 acquisition of Uniqema.

Croda used the proceeds to reduce net debt, selling the business to Malaysian oil palm plantation group Kuala Lumpur Kepong Berhad (KLK). The German business was originally owned by Uniqema.

Under the terms of the deal, KLK assumed the pension obligations of about 30.2m related to the business.

KLK is one of the world's largest makers of palm-based natural chemicals, such as fatty acids and glycerine.

The disposal fits in with the company's decision to dispose of lower-margin businesses following the 410m Uniqema acquisition, and Croda estimates it has made 50m savings from the disposals.