A capital markets day held in the Netherlands yesterday offered investors their latest chance to look under the hood of Croda. The Yorkshire-based speciality chemicals maker is a bit of a hidden secret, as much as a business with a £6 billion market capitalisation and a place in the FTSE 100 can be considered hidden.
Engaged in the relatively unglamorous work of making the chemicals used in products from cosmetics to dietary supplements, Croda has been growing quietly, frequently through acquisitions, while keeping up its margins.
In the past five years, it has bought several businesses, including four technology acquisitions or co-investments in the 12 months to January. Despite this stream of dealmaking, group margins have ranged between a healthy 27 per cent and 30 per cent. To this point, deals completed between 2013 and last year are calculated to have boosted sales at a compound annual growth rate of 65 per cent.
At the same time, returns on invested capital, though slipping slightly in recent years, are hovering just below 20 per cent, while free cashflow last year was £100 million, enabling the company to pay a dividend of about 80p per share. Such is the steadiness of earnings that Morgan Stanley analysts are forecasting total shareholder return over the next three years at 10 per cent a year, above average for its sector. Even this could be an underestimate if Croda continues to find bolt-on businesses, as it has done for more than a decade.
One of the themes of Wednesday’s capital markets event was to give the City an insight into plans to keep its “industry-leading margins, to deliver profit, cash and superior return on invested capital” while “stretching the growth”.
One of the biggest questions is its bet on renewable energy. An investment of $180 million marks the biggest organic bet placed by the company in its 99-year life and, while the short-term impact is expected to hit returns, this could gear up into an area forecast to contribute a third of the group’s earnings growth in the long term.
Closer to home, Croda is expanding its manufacturing facility in Hull at a cost of £27 million, doubling the site’s capacity. The company has indicated that the recent splurge of capital expenditure is done for now, providing room for bigger shareholder payouts.
As a chemicals business, Croda’s fortunes are linked with the global business cycle. That said, the group has shown an ability to cope with the waxing and waning of the world economy better than many of its peers. This is partly explained by its geographic diversification. For instance, 30 per cent of sales come from North America, but only 20 per cent from Asia, providing room for substantial growth.
The company is well protected against lower-cost producers, having made the decision to focus on patent-protected products, for which customers are less interested in the price. Recent acquisitions have strengthened this position.
Croda’s business mix has earned it a premium to its rivals, trading on more than five times its book value. At the same time, while its mergers and acquisition policy has been a case of evolution, rather than revolution, this is not set in stone. Management has been clear that, should a transformational deal arise that they consider attractive, there is no reason why they would not pursue it.
For investors looking at a share price trading around historic highs, the question is whether all this is sustainable. The evidence suggests that the answer is “yes”, even given the rise of more than 600 per cent in the stock in the past decade.
Advice Buy
Why This is one FTSE 100 constituent that looks well set for growth
Easyhotel
Easyhotel may have been conceived and launched by Sir Stelios Haji-Ioannou, but the budget hotel chain’s present shape and strategic direction is attributable to the efforts of Guy Parsons, the former Travelodge chief executive who took over three years ago.
Having reshaped his senior management, Mr Parsons has carved a strong niche in the “branded super-budget” market, delivered strong earnings growth and built an expanding development pipeline in Britain and overseas, with openings of both owned and franchised hotels. The hotel industry veteran is a natural marketeer, garnering column inches in newspapers with a Valentine’s day offer to canoodling couples at the Croydon Easyhotel to turn their bed into a romantic four-poster by paying £5 to hire a canopy.
The loosening of Sir Stelios’s influence continued last month when the Easyjet tycoon ceded his position as the company’s biggest shareholder to Icamap, an investment fund specialising in property as part of a £50 million share placing. Icamap has 38.7 per cent and Easygroup Holdings retains 26 per cent.
Yesterday’s half-year update should provide comfort to investors on trading and expansion. The group, which has 2,430 rooms across 27 hotels in 18 cities, announced the acquisition (subject to planning) of a freehold site in the centre of Chester for the development of a 109-room hotel, due to open next year at a total cost of about £7 million. It will open further owned hotels this year in Leeds, Sheffield, Ipswich and Barcelona, with more to follow, while its franchised pipeline includes properties in Maastricht, Malaga, Lisbon, Belfast, Reading, Dubai, Istanbul, Sri Lanka and Iran.
Total sales, including franchises, are up 33.6 per cent to £16.1 million. Revenue per available room in its owned hotels rose by 11.2 per cent to £36.60, while like-for-like sales in its franchised hotels increased by 13.5 per cent. Cue a 3 per cent rise in the share price to 114½p.
The Easyhotel boss said that he remained confident that its “super-budget” proposition chimed well with the cautious consumer backdrop in the face of economic and political uncertainty.
Advice Buy
Why Easyhotel has the brand, management and funds to continue expanding
