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

Source: ICIS News

2019/02/18

LONDON (ICIS)--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.

BASF share price, last 12 monthsSource: BASF