BASF's Performance Products and Functional Solutions set to profit

30 June 2011 12:10  [Source: ICIS news]

LONDON (ICIS)--Profit margins in BASF’s Performance Products (PP) and Functional Solutions (FS) businesses are to expand in the next two years as pricing power stays ahead of cost inflation, Bernstein Research said on Thursday.

In the short term, however, the situation would be reversed with costs in the second quarter of 2011 outpacing price increases, European analysts at the US-based group said.

“In comparison with the rest of the chemicals universe, PP and FS products, on average, have expanded gross margins by 200bps [basis points] more in the long term, but in the short term have experienced a greater (by around 100bps) contraction of gross margins,” the report said.

These conclusions were based on gross margin performance in the business segments during the past seven years.

“Therefore, we expect prices to continue to increase and BASF’s PP and FS margins to expand through 2011 and 2012, but Q2:11 [the second quarter of 2011] may be challenging,” the report read.

Performance Products is expected to have a 13.2% and 15.1% EBIT (earnings before interest and tax) margin in 2011 and 2012 respectively, while Functional Solutions is predicted to have a 5.1% and 6.1% respective EBIT margin.

Bernstein said it had revised down its second-quarter earnings slightly to come in line with consensus, but remains about 15% and 9% ahead of consensus for 2012 EBIT estimates for the two segments respectively.

Products within the two businesses include textiles, coatings, water treating compounds and automotive chemicals.

The research firm rates the Germany-based chemical producer on the whole at “Outperform” with a target price of €77 ($112).

BASF’s first-quarter net income more than doubled to €2.41bn year on year because of strong sales and increased capacity utilisation.

($1 = €0.69)

For more on BASF, visit ICIS company intelligence

By: Graeme Paterson
+44 20 8652 3214

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