Verbund structure drives strong margin gains for BASF – Bernstein

11 April 2013 12:31  [Source: ICIS news]

LONDON (ICIS)--BASF’s net margins have shown a “significant” improvement over the last 15 years, a development driven by the German company’s integrated Verbund strategy, US-based analyst Bernstein Research said on Thursday.

Bernstein, which recently upgraded its rating for BASF to ‘Outperform’ and increased its target share price for the company to €86 ($112) per share, said that the margin stability improvements were driven by the company’s Verbund petrochemical complex strategy, instead of by its oil and gas or agricultural operations.

According to the firm, BASF’s net margin declined by 400 basis points (bps) from 2007-2009, a similar margin erosion to that seen during the company’s decline in 2001. However, industrial production fell by 1,000bps in 2009 and 200bps in 2001, illustrating BASF’s improved ability to weather production drops without sacrificing profitability.

“BASF’s net margins and ROIC [return on invested capital] have steadily improved while becoming less cyclical over the past 15 years,” said Bernstein.

“They are higher and more stable than most chemicals peers,” the firm added, claiming that BASF shares currently look undervalued compared with many of its peers.

Bernstein highlighted reduced exposure to basic chemicals in favour of specialties, and the divestment of several commodities business – such as polyolefins and part of its styrenics businesses – as key drivers for its improvement. Improved management also played a role, the firm added.

BASF’s significant ramp-up of its exposure to emerging markets has not contributed significantly to stability of earnings, according Bernstein.

“While greater [emerging markets] exposure has increased the absolute rate of growth of BASF’s markets, the impact on stability of growth has been minimal; the volatility of chemicals growth in developed and emerging markets is similar,” the firm added.

BASF shares were trading at €69.36 apiece as of 11:34 GMT on Thursday, over €16 below Bernstein’s target price for the stock.

($1 = €0.77)

By: Tom Brown
+44 208 652 3214

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