The Investment Column: Croda has the potential to look good in the future

Renishaw; Wolfson Micro
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The Independent Online

Our view: Buy

Share price: 433.75p (susp)

We live in a society that is not just ageing but also increasingly vain. Even men these days are not scared to be caught buying various creams and moisturisers that might enhance the look of their skin and maybe help stave off the inevitable.

It is this trend in the Western world that Croda International, the speciality chemicals group, has positioned itself perfectly to take advantage of. It produces the ingredients used to make soaps, creams, cosmetic lotions and vitamin supplements as well as the ingredients that go into dishwasher tablets and stain removers.

Founded in 1925, the group has shed its conglomerate structure, most noticeable under the leadership of Mike Humphrey, its current chief executive. It is he who has focused the company on the consumer products and home care arena since taking over in 1999.

To this end, Croda is in the process of completing the purchase of ICI's Uniqema division. The deal will treble the size of the speciality chemicals group. Mr Humphrey, who for years had eyed Uniqema, is convinced it will help drive future growth in a big way.

Yesterday's interim results show just how well Croda is already doing. It posted an 11 per cent rise in profits to £27.9m, while sales rose 6 per cent to £165m. Although the prospectus containing all the details of the tie-up with Uniqema is yet to be published (it is due at the end of next month and until then Croda shares will remain suspended) key financials are already in the public domain.

The combined group will have sales of £932m and earnings before interest, tax, depreciation and amortisation of £115m. It will carry a heavy debt burden (gearing will stand at more than 100 per cent), but the strong cashflows from the business will easily cover this. In fact, interest cover will stand at a comfortable 4 times. When Croda shares return from suspension next month, they will be worth buying.


Our view: Avoid

Share price: 811p (+2.5p)

Renishaw doesn't really do public relations the way most listed companies do these days. Hence there was no expensive PR firm ready to take the calls of investors, brokers and journalists after the publication of yesterday's annual results from the specialist engineer.

Renishaw says it cannot understand why its listed peers go to all the expensive PR firms. It prefers to let its results do the talking.

The group, which makes measurement systems for precision machining, might have a point. Yesterday, it unveiled a 20 per cent rise in full-year profits to £38m.

David McMurty, Renishaw's chairman and chief executive who, along with the deputy chairman John Deer, controls more than 50 per cent of the group, said his firm enjoyed growth in all geographical regions, particularly in the Far East and North and South America.

With the Gloucester-based company firing on all cylinders, it was able to raise its dividend for the year by 10 per cent to 21.78p. However, before readers pile into the shares, it is worth noting that they already enjoy a top rating. Renishaw trades at over 17 times forward earnings and has a dividend yield of just 2.7 per cent. There is better value elsewhere in the engineering sector.

Wolfson Micro

Our view: Buy

Share price: 419p (+10p)

This column last tipped Wolfson Microelectronics in February. Back then, shares in the designer and maker of microchips that go inside devices such as iPods and MP3 players traded at 430p. Although in the months after they hit a record high of 553p, the stock has since lost all these gains.

This presents investors with a great buying opportunity. As yesterday's second-quarter results showed, business is booming at Wolfson, thanks in the main to the public's seemingly insatiable appetite for electronic gadgets. Profits at the group doubled to $11.5m (£6.2m), while turnover grew 43 per cent to $48m.

David Milne, the chief executive, said that the Edinburgh-based company expects a strong seasonal rise in demand during the current quarter. Such comments eased all worries about a slowdown in sales of mobile handsets, MP3 players and other electronic goods which have been to blame for the 23 per cent drop in Wolfson shares over the past three months.

The stock now trades at 22 times forward earnings. For a company of Wolfson's quality and growth prospects, this is not expensive. Buy.