Source: Sharecast
The bank noted that despite an in-line first-half print and no change to the FY25 guidance - both a rarity in the sector - Croda shares ended down 10% versus the sector down 1%.
"We attribute this to market concerns around:1) competitive pressures given the company's comments suggesting continued negative price/mix in 2H25, partly to gain back share; and 2) indications from the company that the US regulatory environment might result in some near-term uncertainty in the pharma business," JPM said.
It said increased competitive environment in the legacy consumer business of Croda is something that it has discussed repeatedly in its past research and that this was indeed one of the key reasons for its cautious view on the stock previously.
"That said, over the past 18 months, the company has regained more volumes than we would have expected through modest tactical price cuts, albeit from very high levels in 2022, with the majority of these price declines reflecting the pass-through of lower raw material prices," JPM said.
"Further, gross margins (GM) have remained strong at 45% - among the best in the sector."
So while there are some question marks, JPM said the market's pessimism on fundamentals seems excessive.
"Further, we believe FY25-27 consensus is achievable with some upside optionality from actions the company is taking to boost organic growth - especially given the substantial growth capex and opex in recent years - and efficiency to grow earnings and improve returns (7% post-tax ROIC and 10% excluding goodwill in 2025E versus pre Cov-19 long-term average of more than 20%)."
It also said that valuation now appears more compelling.