Broker snap: Exane BNP Paribas upgrades Croda to 'outperform'

4th Sep 2013 09:14

Exane BNP Paribas has upgraded its rating for speciality chemicals group Croda International from 'neutral' to 'outperform' following the stock's underperformance so far this year.The target price has been raised by 26% to 3,200p.The bank highlighted that Croda has underperformed the consumer ingredients sector by 17% in the year to date due to concerns over fading momentum in Consumer Care, which accounts for 75% of earnings before interest and tax (EBIT).While the recent softness in Consumer Care has raised questions over loss of market share and innovation, Exane said that its business remains "rock solid". "Recent weakness appears nothing more than bad weather and unfavourable FX," analysts said.The second half is expected to be the start of a recovery cycle for Croda and the bank estimates a mid-term sales compound annual growth rate of around 6% in 2013-2016, in line with management targets (5-10%).One of the company's other divisions, Performance Technologies, has been dragged down by its exposure to European automotives (15% of divisional sales), but Exane said that recent datapoints offer encouragement.The bank also said that Croda's margins could surprise positively from "improving operating leverage as volume tailwinds materialise". It forecasts a 130 basis-point (bp) improvement in the EBIT margin in 2014, compared with the current consensus estimate of just a 40bp gain.Croda's share price was down 1.21% at 2,614p in morning trade in Wednesday, though it should be noted that the stock went ex-dividend.BC