Sector News

BASF diversified portfolio, ‘less well run’ downstream businesses to cap shares – Bernstein

February 19, 2019
Chemical Value Chain

BASF’s diversified portfolio, the lack of feedstock advantage compared to US peers and “clearly less well run” downstream divisions make the German chemical major’s shares a “value trap”, equity chemicals analysts at Bernstein Research said on Monday.

However, the analysts expect a slight improvement in BASF’s earnings going forward on the back of lower raw materials costs and higher returns at downstream divisions – business like catalysis or nutrition.

“The earnings mix will improve as downstream segments drive margin expansion. Raw material cost inflation is fading, and downstream earnings will improve at upstream Chemicals expense,” said Bernstein.

“As a result, on the perception of improved earnings quality, the stock should begin to re-rate, though we would expect to see a delay from weak macro [economics].”

BASF’s shares have fallen by almost a quarter of their value in the last 12 months (see bottom graph) and, while expecting a slight recovery, analysts at Bernstein said the stock will not outperform “in a sequentially slowing” environment.

Shares were trading on Monday morning at €66.46/apiece. Bernstein placed its 12-month target price forecast at around €73/apiece.

However, the valuation for the stock remains at ‘Market-perform’, or ‘Neutral’ in most investment banks’ terminology.

“If macro [economics] keeps slowing, BASF shares will remain a value trap. BASF’s trading history is closely linked to industrial production, and a cyclical slowdown is now reflected in the stock’s cheap valuation,” said the analysts.

BASF’s growth could come from acquisitions, said Bernstein, although adding that the recent purchase of Bayer’s seeds business, as well as some herbicides, brought into BASF “quality assets” which were, nevertheless, “sub-scale” in relation to the potential upside in the share price.

“Diversification is for fund managers, not for chemical companies. Fundamentally, we struggle with the company’s market positioning versus peers in practically every segment,” said Bernstein.

“It [BASF] lacks the feedstock advantage (and focus) of US peers making its upstream Chemicals business less attractive. Its downstream businesses are clearly less well run than peers, whether in catalysis or nutrition, with margins several percentage points worse.”

Weak organic growth could be supplemented with yet more acquisitions as the German major is set to remain “an industry consolidator – and diversifier” with a strong balance sheet: according to the analysts, BASF’s firepower for mergers and acquisitions (M&A) stands at €39bn.

“The next few months look like a value trap and visibility for 2H [second half of 2019] is poor … [Portfolio] diversity does not lead to better TSR [total shareholder return],” said Bernstein.

“We’d like management to buy back shares to generate value [for the share price].”

BASF was not immediately available for comment at the time of writing.

Source: ICIS News

comments closed

Related News

June 24, 2022

BASF to build commercial scale battery recycling black mass plant in Schwarzheide, Germany

Chemical Value Chain

BASF will build a commercial scale battery recycling black mass plant in Schwarzheide, Germany. This investment strengthens BASF’s cathode active materials (CAM) production and recycling hub in Schwarzheide. The site is an ideal location for the build-up of battery recycling activities given the presence of many EV car manufacturers and cell producers in Central Europe.

June 24, 2022

Clariant restructures business units, reorganizes leadership

Chemical Value Chain

Clariant says it is reducing its number of businesses from five to three, by merging units, under a reorganization that is in line with the company’s purpose-led strategy and cultural transformation. The moves will position Clariant for long-term sustainable growth, the company says.

June 24, 2022

Chemicals & Plastics Procurement: what to expect in the second half of 2022

Chemical Value Chain

Chemicals & plastics industry has the most diversified end-use market across all manufacturing industries. The industry returned to growth in 2021 but a supply chain crunch prevented it from becoming stronger. The market is likely to stabilize in the second half of 2022 with a supply-demand balance.