Investment Column: Croda's prospects are more than skin-deep

Spice; Elephant Capital

Our view: Buy

Share price: 901p (+59.5p)

Croda's shares touched an all-time high after the chemicals group posted a solid set of full-year numbers yesterday. Strong demand for cosmetics and other personal care products underpinned the performance of the company's consumer care division, while the industrial specialities business, which was hit as destocking dampened demand in the first half of the year, rebounded as the economic outlook improved. Croda is positive about the current year, and there are reasons for confidence. Up to a point.

We have no doubt about the strengths of the consumer care division. Its resilience throughout the downturn means investors can safely look forward to gains even if the global economic recovery is weak or we find ourselves in the dreaded "double-dip" downturn. Unless consumers suddenly stop shopping for skincare products and the like, we do not foresee any ugly surprises.

The industrials division, on the other hand, did suffer during the recession. It encompasses the company's lubricant additives business, which is exposed to the automotive and engineering sectors. Activity in these markets almost seized up in the first half of 2009 and, though conditions have improved, with Croda seeing increasing demand for its environmentally benign additives, the overall picture remains fragile.

But whatever happens in the short term, the company's green offerings are likely to do well as consumers increasingly opt for eco-friendly products. The valuation is also supportive, with Croda trading on a multiple of 13.4 times UBS's full-year forecasts. That falls to 12.3 on times in 2011 while the prospective yield rises from 3 per cent in 2010 to 3.2 per cent.

These numbers, and the momentum in the consumer care division, more than offset any serious concerns. We're confident in saying buy.

Spice

Our view: Sell

Share price: 46p (-9p)

Investors, take note: whenever a company announces plans to conduct a strategic review, it is frequently because things are going badly.

Yesterday, the market was served a lot of waffle from the outsourcing group Spice, which issued a profit warning, adding that the weather – there's that excuse again – and the end of the regulatory cycle in a number of its businesses were to blame for them missing their 2010 profit expectations.

The interim chief executive Martin Towers, who has only been in the job two weeks, said the start of the review was a chance for a "fresh start" and was an indication that the group was "going back to basics" with its "core" businesses. It did not wash with investors, with the stock falling a precipitous 16 per cent. Worse could follow.

Some investors, of course, may take this as an opportunity to buy an inexpensive stock. And it's true that several of the company's businesses, such as its bill certification and energy consultancy, are performing well while others, such as the telecoms division, will be hived off for a decent price. Trading on an April 2010 price-earnings ratio of 8.2 times, the stock is looking cheap against its peers.

Spice's gas arm, however, is in trouble and while the profit warning will have accounted for most of yesterday's share price fall, until the division is sorted out, or sold off, the shares are likely to struggle further.

There was nothing yesterday to suggest that the dividend is likely to change – the yield of 3.1 per cent is not bad – but when all things are taken together, there is no good reason to be in this stock until we see real evidence of improvement. Sell.

Elephant Capital

Our view: Speculative buy

Share price: 64p (unchanged)

Elephant Capital is an India-focused private equity fund, and, as such, has not had an easy time of it over the past year. The net asset value per share has fallen sharply, to 84p from 96p, although the company's cash pile has increased, thanks to divestments. Some of the companies in which it has invested have had a rocky time of it thanks to the downturn and problems with the authorities.

Still, its chairman Pramath Raj Sinha is at least honest about the problems the company has had and the difficulties it faces, while striking an optimistic tone long term about the Indian economy.

We have some concerns about this stock. The discount to net asset value is substantial enough to look worrying as much is it offers an opportunity. The shares are illiquid and the spreads are substantial. But there is the opportunity for a turnaround and it has some intriguing investments, such as Global Cricket Ventures (the digital licensee for the Indian Premier League). However, only speculative investors should buy.