Europe chems profit blues continue as economic backdrop weakens

LONDON (ICIS)–European chemicals firms continue to struggle to generate profitability in an economic environment that continues to worsen, with the most highly-traded industry stocks at heightened risk of price falls as the second-quarter reporting season begins, Bernstein said on Thursday.

Automotive sector demand has throttled economic growth in export-oriented markets such as Germany through the year and a rebound has been slow to materialise, with sentiment among company managers in the country slipping to its weakest since late 2014 in June.

The US-China trade war is continuing to impact on sentiment and demand for European firms, Bernstein said, and growth is slowing in the consumer chemicals sector as pricing turns negative.

While some firms including BASF and Fuchs Petrolub have already issued profit warnings on the back of tepid auto demand, while Chr Hansen cut health and nutrition guidance and Brenntag warned that weakness is likely to continue into the second half of the year.

The most highly-traded European chemicals stocks face a heightened risk of price falls in the event of missing consensus estimates for second-quarter results, with Linde, DSM and Air Liquide most sensitive to any mis-steps.

Despite the continuing bearish picture going into the second half of the year, some companies are still undervalued by the market, according to Bernstein analysts.

Evonik raised its guidance in the first quarter of the year and those trends continued through the following three months, leaving consensus below the company’s prospects, the firm said.

Earlier this year, Evonik CEO Christian Kullmann said the company’s share price was being punished by investors, claiming that the market was more focused on political and economic uncertainty than its underlying performance.

AkzoNobel has scope to exceed market expectations on the back of margin expansion amid lower raw material costs in the second half of the year, after several years of a heavy feedstock burden. AkzoNobel CFO Maarten de Vries projected in March that raw material costs could turn positive in the second half of 2019.

Air Liquide shares are likely to be resilient due to its predictable industrial gases business model, while BASF had already moved to absorb the shock to its share pricing after cutting full-year earnings estimates from a small increase to a contraction of up to 30% earlier in July.

Despite hopes that the headwinds may abate in the second half of 2019 after a slow 12 months, conditions are likely to remain difficult, Bernstein added.

“Sentiment weakened with the June IFO business climate at its lowest level since Nov’14, autos continue to disappoint, US-China relations worsen, demonstrated through direct impacts on the stocks, with concerns over demand particularly in Asia,” the firm said in an investor note.

“Industrial stocks will be most affected but Consumer are not completely immune either.”

Pictured: BASF’s Ludwigshafen site in Germany
Source: Caroline Kreutzer/imageBROKER/Shutterstock