Barclays Turns Bullish on Croda as Turnaround Potential Grows

Cost savings, activist investor support, and strategic overhaul could lift share price after years of decline

British speciality chemicals firm Croda International (LON:CRDA) has received a vote of confidence from Barclays, which upgraded the stock from “equal weight” to “overweight”, citing significant turnaround potential, strategic changes, and cost discipline measures.

Despite years of underperformance, analysts now believe Croda's valuation and upcoming strategy present an attractive risk-reward balance for investors.

Key Points:

• Barclays upgrades Croda to 'overweight' from 'equal weight'
• New price target set at GBp3,100, representing a 16% upside
• Share price down around 70% since late 2021 peak
• Activist investor involvement and cost-cutting seen as catalysts for change
• Croda’s £100m cost savings plan could exceed expectations
• Forecasted 2025 EBIT and PBT slightly reduced but in line with market consensus

Barclays' View: Time for a Rebound?

Croda’s shares have declined sharply over the past four years, falling about 70% from their 2021 peak and significantly underperforming the FTSE 100, which rose by 26% during the same period. This sustained decline, coupled with pressure from exclusion in major indices, has kept investor sentiment subdued.

However, Barclays believes this is about to change. The bank's analysts state that the entry of activist investor Standard Latitude could prompt a more decisive and investor-focused strategic overhaul.

"Investor interest in Croda remains anchored to a mean-reversion thesis," the Barclays note said, suggesting long-term value could be unlocked if the company executes on its turnaround strategy.

Strategic Cost Savings & Missed Lipid Opportunity

A central part of the turnaround strategy is a £100 million cost-saving programme. Barclays believes the market has not fully appreciated the upside this initiative could deliver, especially if it strengthens margins and improves earnings visibility.

However, not all is rosy. Barclays flagged challenges in Croda’s lipid division, referencing missed opportunities during the COVID-19 vaccine boom due to the company’s lack of patented ionisable lipids — a gap that led major pharma players like Pfizer to partner elsewhere.

Though the lipid market is now likely oversupplied, Barclays argues there’s still room for restructuring and value extraction, particularly with activist involvement.

Valuation and Outlook

• Current valuation is described as “trough-level,” suggesting strong upside potential if the company delivers.
• Barclays predicts adjusted EBIT of £293 million and adjusted PBT of £267 million for FY2025, slightly lower than earlier forecasts due to headwinds in the U.S. pharmaceutical sector.
• The broker has introduced a sum-of-the-parts valuation, complemented by a discounted cash flow model, reflecting the diverse opportunities in Croda’s portfolio.

What This Means for Investors

This shift in tone from Barclays could encourage renewed interest in Croda shares, particularly from value and turnaround investors. The involvement of an activist investor increases the likelihood of:

• Asset divestitures
• Streamlined operations
• Shareholder-friendly changes

While the stock remains volatile, the potential for re-rating is clear, especially if cost savings materialise and operational performance improves.

Bottom Line

Croda International may finally be turning the corner. With a focused cost-saving drive, activist investor engagement, and an attractive valuation base, the chemicals firm is starting to look like a credible recovery story.

For investors, this could signal a buying opportunity, particularly for those with a medium- to long-term horizon willing to weather short-term volatility in exchange for potentially strong gains.

Sources: (Investing.com)