Croda PLC (LON:CRDA) resumed its descent on Thursday as Barclays downgraded its rating for the specialty chemicals firm to ‘underweight’ from ‘equal-weight’, following on from a similar downgrade on Wednesday by JP Morgan Cazenove after a recent share price boost.
The bank, however, did increase its target price for the FTSE 100-listed firm to 5,650p from 4,450p, reflecting a new discounted cashflow (DCF)-based valuation approach, albeit with the shares currently changing hands at 6,364p, down 1.8% on Wednesday’s closing price.
Croda shares jumped 7% on Tuesday on the back of an agreement with Pfizer Inc. (NYSE:PFE) to supply excipients, which are substances than improve the efficacy and delivery of the active pharmaceutical ingredients in a drug, to manufacture the US pharma company’s coronavirus (COVID-19) vaccine candidate. These excipients come from the UK chemical company’s recent acquisition of Avanti Polar Lipids.
In a note to clients, the Barclays’ analysts said: “The positive reaction to the news that Croda will supply excipients to Pfizer‘s Covid-19 candidate looks overdone to us. Our model suggests that the increase in value can only be justified in an unrealistic best-case scenario. The vaccine news might even turn out to be a negative.”
They added: “First, a key positive catalyst is now gone. Second, it may trigger (further) rotation out of more defensive stocks. Croda’s shares have re-rated the most in our coverage over the past 12 months, having to a certain degree decoupled from fundamentals, in our view.
“We are more guarded on the outlook for the all-important Personal Care segment. This translates into the lowest projected TSRs in the sector and also puts us 4% below Bloomberg consensus for H2.”
JPMorgan cut to ‘underweight’ too
On Wednesday, analysts at JPMorgan downgraded their rating for Croda to ‘underweight’ from ‘neutral’, but raised their target price to 5,700p from 4,250p, saying the stock was too expensive.
The US investment bank’s analysts said the Pfizer deal should be value-neutral as it will likely result in an earn-out payment of up to US$75mln to the previous owners of Avanti, which should broadly offset the three years’ earnings contribution from this vaccine.
The underlying earnings (EBIT) contribution should be around £25mln in the year to December 2021.
“The stock reaction yesterday seems excessive to us … Fundamentally, we like the company but not the valuation,” the JPMorgan analysts concluded.