When Elementis put out an entirely predictable profit warning a month ago, there were fears over other specialist chemicals businesses, such as Croda International. Those concerns seem to be overdone.
Elementis has an exposure to the oil and gas industries and is considerably smaller. Croda is a whisker off joining the FTSE 100. It also has a life sciences, or healthcare, division that is growing at double-digit rates, providing pharmaceutical-grade Omega-3 and other specialist products.
This gives some protection from the usual cyclical trends in chemicals and against the inevitable erosion of earnings from the high pound.
It is also no accident; Croda has spent the past few years moving away from bulk product and into more profitable business, working directly with customers producing cosmetics and the like to provide what they need while spending heavily on R&D.
It is also focusing on a range of higher-margin chemicals, referred to as new and protected products. In the first half to the end of June, sales of these were up by a fifth and now account for a quarter of the total.
The halfway figures show progress on all fronts, if you disregard some understandable profits slowing at Croda’s performance technologies division, because of its limited exposure to oil and gas, and higher sales from a Chinese maker of lower-margin lubricants, bought in 2013. The return to growth was most noticeable in Europe and in personal care products as consumers started to spend more.
At constant currency rates, pre-tax profits were ahead by 7.3 per cent at £135.7 million and the dividend is up by 5 per cent to 31p. Revenues were up by more than 5 per cent on an underlying basis, again an achievement in specialist chemicals.
The real question is what Croda will do with surplus reserves, given its high cash-generation and falling debt. The company is considering a couple of acquisitions, but has promised a decision with the results early next year. The shares, up 156p at £29.51, are not cheap on 22 times’ earnings, but still look worth buying for that cash return.
Sales £546.6m
Dividend 31p
24.6% Half-year operating margin
MY ADVICE Buy long term
WHY Shares are on a high rating but this seems justified given Croda’s advantages over the rest of the sector and the potential cash return
PZ Cussons may have been around in one form or another for more than 130 years, but today the shares are just where they were five years ago. The company is one of the most reliable dividend payers on the market and its results for the year to the end of May show the 42nd consecutive increase.
Yet investor sentiment over the shares has been clouded by its dependence on the Nigerian economy. There were four more negative factors on display with the figures. They included ebola and civil unrest in the north. The presidential elections brought disruption, too, even if they went off as well as anyone could have expected.
The main problem was the 25 per cent devaluation of that country’s currency, the naira, and fears that it could fall further. This takes money out of the pockets of local consumers and reduces reported profits. It means that, given the higher cost of imported raw materials, Cussons has to force through price increases.
Its strong position in Africa’s most populous country must be an advantage in the long term. All the above, though, and the weaknesses of the Australian and Indonesian currencies, has distracted attention from the purchase of higher-margin brands elsewhere, such as St Tropez and Sanctuary beauty products and Rafferty’s Garden baby food in Australia, and the relaunch of brands such as Carex.
Take out currencies and acquisitions and underlying profits were up 2.7 per cent. Cussons is a share to buy on weakness; off 2¾p at 357¼p, on 19 times’ earnings, they look to be at the top of their run.
Revenue £819m
Dividends 8p
MY ADVICE Avoid for now
WHY Shares are highly valued and trading at top of range
It is a year now since SSP Group was floated and investors in the operator of food and drinks outlets at airports, stations and elsewhere will have little to complain about. The shares were floated at 210p; they fell 2½p to 304¼p after a third-quarter trading update that showed no real surprises.
SSP has three advantages that go some way to justify the high multiple on which the shares are trading. There is plenty of scope for enhancing margins, over a long period, by operating more efficiently. Like-for-like sales will grow, up 3.2 per cent in the quarter. There are plenty more locations to go for in undeveloped markets, such as China and the Far East, as air travel expands.
The company is adding new business at a rate of, on average, 1 per cent a year, although inevitably this will be lumpy — a third-quarter rise of 0.9 per cent was well ahead of the first half because of the loss previously of a British rail contract.
The negative is currency movements, with three fifths of the business outside the UK. SSP is a multi-decade story, though, with the shares on 22 times’ this year’s earnings, I would be tempted to take profits on that float price.
Like-for-like sales growth 3.2%
MY ADVICE Take profits
WHY Shares are trading well ahead of their float price
And finally…
Some unusual good news from the oil exploration sector and from Premier Oil on the Mexican licenses it won last week. Interest among the oil companies in the 14 blocks being auctioned by the country’s government was understandably limited. Premier now says that it saw only two blocks it liked, applied for both and won both. The company thinks Mexico could become a core part of its production assets in due course. The shares gained 3 per cent; they have lost more than half their value over the past year, though.
Follow me on Twitter for updates @MartinWaller10
