Shares in Croda International (CRDA) dropped 13% to £52.44 on Friday after the speciality chemicals company issued a full year profit warning following weaker than expected trading in the first five months of the year.

It is one of the biggest daily falls seen in the shares, which have now halved from the peak levels of £102 in December 2021.

Croda said sales volumes in Consumer Care fell by a double-digit percentage compared with the same period in 2022 caused by customer destocking.

Price rises put through in 2022 and favourable foreign exchange movements only partially offset the drop in volumes, resulting in unchanged sales over the first five months and flat operating profit compared with the second half of 2022.

It was a similar story in the Life Sciences and Crop divisions which the company said are suffering from ‘rapid’ customer destocking.

Life Sciences is being negatively impacted by lower sales for Covid applications.

WHAT IS THE FINANCIAL IMPACT?

Croda said it generated £143 million of pre-tax profit over the first five months of 2023, but with customer destocking expected to continue through the second half, full year pre-tax profit is now anticipated to be between £370 million and £400 million.

Analysts at Jefferies reckon the new guidance is 13% shy of consensus expectations which sit at £440 million. Over the course of the last year consensus earnings estimates have fallen around 4% according to Refinitiv data.

The share price reaction looks to be consistent with the new guidance, but analysts may decide to take a more cautious view than management to factor in further ‘slippage’ later in the year.

Russ Mould, AJ Bell investment director, commented: ‘When a company has a track record of delivering the goods, as Croda largely has in recent years, then a premium rating is awarded by the market. Which means when something goes wrong the share price reaction can be particularly negative.

‘The chemicals business soared during the pandemic thanks to its acquisition of Avanti Polar Lipids in July 2020.

‘This made Croda one of the few companies able to make LMPs or lipid nanoparticles, fatty molecules used in drugs and vaccines to encase and protect the stuff in the drugs and vaccines that help people – including in mRNA treatments like the Covid vaccines made by Pfizer (PFE:NYSE) and Moderna (MRNA:NASDAQ).

‘Inevitably the retreat of the pandemic had an impact on demand in this area and helped to dampen some of investors’ excitement around the business, even if longer-term mRNA has a role to play in other types of medicine.

‘Croda remains a quality business and has a decent amount of credit in the bank with investors but it needs to make sure it communicates better with the market to avoid the sort of profit shock it has served up today.’

Croda’s earnings alert had a knock-on effect on the wider sector, with Swiss Fragrance maker Givaudan (GIVN:SWX) and German favourings and functional foods group Symrise (SY1:XETRA) falling 0.5% and 4% respectively.

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Martin Gamble) and the editor of the article (James Crux) own shares in AJ Bell.

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