BASF should sell styrenics business - UBS

07 November 2005 14:19  [Source: ICIS news]

Coat hangers made from BASF's StyroluxLONDON (ICIS news)--German chemical giant BASF should divest its styrenics business and not restructure it as planned due to the limited earnings growth and the imminent challenge from Middle East-based producers, UBS said in an investment note on Monday.

"We are concerned that BASF continues to try to restructure areas such as styrenics and lysine rather than consider exiting," the bank said in a note to clients. "In the case of styrenics, timing might not be right since the business is at very depressed earnings levels but ...  the long-term outlook is not great, and styrenics are unlikely to be able to cover its cost of capita through the cycle."

BASF's Q3 styrenics sales amounted to Euro1.14bn, down 11% from a year ago. It is the biggest of three divisions within the plastics segment, which also include performance polymers and polyurethanes.

UBS, which maintained its buy rating on the company, dropped its share target price by Euro2 to Euro69, partly due to the higher pension deficit assumption and lower associates book value.

It said, based on comments from BASF management, it was unlikely that the company would make a major acquisition despite being on the look-out for suitable targets.

"Given the size cap they (BASF) have imposed, these acquisitions are more likely to involve parts of companies (e.g. product lines) rather than entire companies," it said.

UBS said it had expected a margin improvement during the third quarter for both BASF’s plastics and performance products but plastics margin in fact declined to 9% from 9.4% in Q2 this year and performance products margin fell to 10.3% from 13% in Q2.

“In the case of plastics it appears that some of the margin was due to worse product mix … and significant shutdowns in styrenics,” UBS said. “Some of these effects should not be present in Q4 05, which should help underpin profitability in what is likely to be a tougher quarter due to much higher raw material prices.”

But the bank said it could not explain the more significant margin decline for performance products.

BASF last week reported a 13% rise to $1.33bn (Euro1.13bn) in third quarter operating profits but warned of the continued pressure on margins from high raw material and energy costs.


By: Hilde Ovrebekk
+44 20 8652 3214



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