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25 May 2021

Croda: The Silent Hero

The list of global vaccine providers is staggering; the likes of Pfizer-BioNTech, Oxford-AstraZeneca, Moderna and Novavax are names regularly hitting the headlines. With the corporate success of such names intrinsically linked to the effectiveness and efficiency of their respective vaccines, it is not surprising to see wild swings in the share prices of these companies.
 
However, one company which has crept under the radar, and is benefiting from the extraordinary technological developments in life science and the wider biotechnology/pharmaceutical sector, is Croda International.
Yorkshire-based Croda is a highly diversified chemicals company with tentacles stretching into this high-growth and constantly-evolving arena. The group is a leading global manufacturer of polar lipids, which lies at the crux of the technology needed to produce the Pfizer- BioNTech RNA vaccine. Pfizer’s COVID-19 vaccine was the first time this RNA technology had been distributed globally, potentially opening the floodgates to a wave of new vaccine treatments over the coming years.
 
This development is expected to supercharge revenue growth, with Croda already revising the sales expectations from the contract for the BioNTech/Pfizer vaccine to £89.5m in 2021, 25% higher than earlier estimates. The possibility of annual booster shots could generate a lucrative, recurring, and contractual revenue stream for the foreseeable future. Furthermore, Croda is set to benefit as the European Union grapples with the potential loss of the Johnson & Johnson and AstraZeneca vaccines given the uncertainties and worries surrounding the possible side-effects of the jabs. The EU has agreed to buy an additional 50 million doses from Pfizer- BioNTech in 2020’s second quarter and is in talks to purchase up to 1.8 billion more doses over the next two years.
 
The company also delivered record results in its life sciences division, which has witnessed growing activity in agriscience and widespread drug development. Touching on the former, the group produces biostimulants to improve the yield and quality of crops, creates ingredients for crop protection, and makes a range of bio-based, renewable ingredients out of corn, which act as a substitute for petrochemicals.
 
While this organic growth is undoubtedly cheered, Croda is certainly not immune to mergers and acquisitions activity. Over the past 12 months, the chemicals group has agreed to purchase Spain’s Iberchem for €820m, Parfex SA for €41.8m, Avanti Polar Lipids for £188m and, more recently, the French cosmetics company Alban Muller for €25m.
 
Investors should look at the history books before they start to worry; the company has a long history of acquisitions, from Sederma in 1997, which specialised in anti-ageing skincare ingredients, to Uniqema in 2006, which together have fashioned a leading chemicals and personal care conglomerate. While this area of the business has struggled during the COVID-19 crisis, the pent-up consumer demand which is patiently waiting to be unleashed should provide a tailwind to sales in this division.
 
The Iberchem-Parfex deals propels Croda’s reach in the fast-growing fragrances and flavours market, while the purchase of Avanti, a specialist in lipid-based technologies, will work towards achieving the company’s top priority; namely, to expand its drug delivery business.
 
In addition to the above, from a fundamental perspective, Croda stacks-up well against its rivals; over a five-year rolling period, the UK company has delivered a superior operating margin with lower leverage and is offering investors a well-covered, albeit skimpy, dividend. The shares have performed robustly over the past 12 months, and are up c.40%, and with the growth prospects in store, the 37x Price-Earnings multiple can be somewhat warranted.
 
It is poignant that the same company which supplied oils for camouflage and gun cleaning during the Second World War, is now on the frontline fighting the invisible enemy that is COVID-19.

This article was taken from the Spring 2021 issue of the publication, 1875. To sign up for our investment publications please visit www.redmayne.co.uk/publications.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
 
Croda: The Silent Hero
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