Croda International PLC (LSE:CRDA) ‘ticks all the boxes’ for what you would want to buy an ideal share in the consumer chemicals sector, says UBS, giving the share price target a mighty hike.
A wish list to buy a share in the sector, the bank said, would include “upside to consensus estimates…transition away from more cyclical assets…balance sheet optionality provided by a low leverage ratio… and a management team that has the market's trust to allocate this capital efficiency”.
UBS said it sees 9% upside to consensus earnings per share in 2022, with the FTSE 100 business looking “set to relinquish a significant proportion of its cyclical exposure” following the strategic review in May of the Performance Technologies and Industrial Chemicals ('PTIC') businesses.
A disposal of 75% of the combined PTIC divisions seems “most likely”, according to management comments, which would leave Croda in a net cash positive position by the end of 2022 based on UBS calculations.
With its 'wish list' met, UBS upgraded Croda to ‘buy’ from ‘neutral’ and raised its share price target to 11,500p from 9,000p.
“Evidence from both Lonza in Chemicals and L'Oréal in Staples that an inflection in organic sales growth prospects can result in multi-year re-rating gives us comfort there is further re-rating potential beyond the 20% already seen by Croda [in the year to date].”
UBS said it sees upside to consensus based on raised Pfizer contract revenues, plus expectations of greater Personal Care revenues due to a combination of ongoing pricing to offset raw materials and sustained robust underlying demand trends.
Analysts Charles Eden and Andrew Stott noted that Croda shares are trading at their historical peak both on an absolute basis (23 times earnings) and relative to the consumer chemicals sub-sector (a 7% premium).
“While this may see the stock screen as expensive, we think it underappreciates Croda's current transition,” Eden and Stott said, with the 'New Croda', adjusted to reflect the potential disposal of 75% of PTIC, looking “set to deliver the fastest organic sales growth (7.1% p.a.) and have a best-in-class EBIT margin (avg 32.5%)”.
In this context, the analysts believe there is “scope for even further rerating”, valuing Croda at 27.2 times 2022 on an EV/EBITDA basis, representing around a 20% premium to peers.