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Berenberg ups Croda to 'buy', highlights scope for cash returns
Berenberg upgraded speciality chemicals group Croda International to 'buy' from 'hold' and lifted the price target to 50p from 41.50p as it pointed to organic growth and the scope for cash returns.
The bank said it's turned bullish on Croda's ability to deliver consistently strong organic growth. This, along with the company's "admirable" track record of innovation, strong returns, and scope for cash returns to shareholders, means there's no reason the shares shouldn't trade on a higher multiple, closer to that of other consumer chemicals names.
"Given our expectations for organic growth and Croda's c50% exposure to the consumer market, we believe it makes sense to compare Croda to consumer chemicals names like Symrise and Givaudan.
"Croda trades on a 2018E P/E multiple of c24x, representing a 15% discount to Symrise and 10% to Givaudan. Given Croda has been able to generate superior returns compared to both companies throughout the cycle and maintain stronger margins, we would argue that this valuation disparity should not exist."
Berenberg reckons Croda will post organic growth of 3.9% in 2017, followed by 4.3% in 2018. In the personal care division, this will be driven by trends towards premiumisation within the beauty and personal care end market, and also a shift in Croda's customer base towards the growing independent players.
Meanwhile, in the life sciences division, the successful integration of the Incotec business, acquired in 2015, and a pick-up in end market growth should allow the segment to grow at a mid- to high single-digit growth rate in the medium term.
At 1450 GMT, the shares were up 2.8% to 4,596p.