Against some stiff, and often more high-profile international opposition, Croda International is an impressive FTSE 100 performer.
Since this column visited the chemicals group in November 2018, it has bought a specialist company for the treatment of cancer in pets and reported a solid set of annual results, including the payment of a special dividend.
That purple patch, however, was followed by more muted half-year numbers and the shares have made only modest gains, up a little more than 3.5 per cent in that time.
Croda International was founded in Yorkshire in 1925 when a chemist and an entrepreneur joined forces to open a factory for refining wool grease.
It has grown to become a worldwide specialist manufacturing group with a stock market listing that values it at just under £6.5 billion.
It employs more than 4,200 staff across a collection of factories and offices in more than 36 countries and analysts reckon that last year it made a pre-tax profit of £327.7 million on revenues of just above £1.4 billion.
The group’s three divisions, all of which make the essential active ingredients for products in their chosen markets, have been strong performers in recent years.
In ascending order by revenues, life sciences makes ingredients for agricultural crop treatments and the active contents of drugs; performance technologies makes chemicals used in lubricants, detergents and washing liquids; and the products from personal care feature in beauty treatments from lipsticks to face creams.
It is personal care, helped by effective profit margins of 34.1 per cent in 2018, that has helped to spur Croda’s success, and its valuation, in recent years. However, this is also the division, along with performance technologies, that became tricky last year.
The market for beauty products has been hit hard by the trade war between Washington and Beijing because of the large number of goods made in China and the higher prices for cosmetics as a result of additional tariffs that dampened demand.
New legislation governing internet retailers in China also held back Croda’s sales in Asia, leading to a drop in sales at its personal care division of 3.6 per cent to £246.8 million over the first half of last year and a small drop in return on sales to 33.3 per cent.
The decline in new car production, accompanied by weaker demand in the chemicals sector, also spurred a 6 per cent decline in sales at the performance technologies division to £226.8 million during the six months to the end of June.
This division’s return on sales dropped from 19.3 per cent to 18 per cent and its half-year adjusted operating profit fell by 11.2 per cent to £40.8 million, from £45.6 million.
A very strong showing by the life sciences unit, where margins of 30.6 per cent are approaching those in personal care, ensured that Croda managed to turn in a resilient overall halfway performance. However, the heightened pressures on trading are undeniable and help to explain the relative weakness of the share price.
Croda has lost none of the qualities that prompted this column to recommend holding the shares 14 months ago; indeed the pace of growth in life sciences adds a further powerful string to its bow.
The quality of the group has ensured that its shares — up 30p or 0.6 per cent to £50.60 at yesterday’s close — come with a high rating relative to its peers in Europe, including Clariant and Givaudan, both based in Switzerland.
Shares trade at 24.8 times consensus forecast earnings and yield about 1.8 per cent. Hold them still.
ADVICE Hold
WHY Company is resilient but markets are going to be tough probably for at least a year
AO World
When shares in AO World touched their highs in the weeks after its flotation in 2014, they gave the loss-making white-goods internet retailer a market value of just over £1.8 billion.
The group is still with us, and still reporting losses, but its stock market worth has dwindled to just above £411 million. This is the result of numerous factors, from its travails on the Continent to wider pressures on big-ticket spending. One thing is for sure — the hype has long gone.
AO World was founded in Britain as Appliances Online in 2000 by John Roberts, 46, who returned as chief executive last February after taking a back seat for two years. He took back control of a business that had become considerably more diverse, having moved into Germany and the Netherlands.
The group now also stocks a far wider range of appliances, including smaller products such as hairdryers, and it bought an online phones retailer, Mobile Phones Direct, since renamed AO Mobile. It delivers goods for other retailers and owns a majority stake in a recycling centre.
Having carried out a wholesale review, Mr Roberts shut down the Dutch operation, at a cost of £3 million, in order to concentrate on Germany, where he sought to improve terms with suppliers to help fatten its wafer-thin margins and move the division into profit.
He also tried to ramp up profitability in the UK, which in fairness has been trucking along, lifting revenue by 20.3 per cent to £402.7 million during the six months to the end of September, or an underlying growth of 4.5 per cent if revenues from the acquired phones business are stripped away.
AO World becomes profitable in Europe when annual revenues, €173.3 million in 2018, hit €250 million. Given the renewed emphasis, getting the region — and thus the group — into the black seems attainable, but unlikely within the next two years.
Meanwhile, AO World pays no dividend so there is no yield. The shares, down 1p, or 1.1 per cent, to 86p, trade for about 17 times Shore Capital’s estimated measure of profitability for 2021. At this stage, the risks are too high to justify an investor getting involved.
ADVICE Avoid
WHY With profitability at least two years away risks are high
