BASF earnings ‘momentum’, more divestments to support further expansion, dividend - bank

Author: Jonathan Lopez


LONDON (ICIS)--Better-than-expected third-quarter financial results, as well as potential divestments will support BASF’s future expansions and dividend payment, investment bank Credit Suisse said on Monday.

On 8 October, the German chemicals major - bellwether for the European petrochemicals industry - released preliminary financial results for the third quarter showing how the pandemic has upended previous expectations.

The producer said it expects up to €2.8bn in asset impairments in the third quarter; key downstream industries for BASF like automobile and aviation remain well below pre-pandemic levels.

But financial analysts managed to see some positives in BASF’s financials; Credit Suisse on Monday upgraded its forecast for operating profit (or earnings before interests and taxes, EBIT) by as much as 12% for 2020 after that metric performed better than expected.

BASF divestments in construction chemicals, pigments, or oil and gas could be followed by more, as private equity is back in the chemicals industry with large deals agreed amid the pandemic.

Credit Suisse added that it expects the full-year free cash flow (FCF) in 2021 to cover the dividend, which would help BASF achieve “further comfort surrounding its ability to sustain” the dividend to its shareholders.

In fact, the bank said the implied dividend yield would be well above, at 6.1%, that of the company’s core chemicals operations at 3.5% (according to the bank’s estimates).

“This, in conjunction with the continued improvement in the cycle, supports positive earnings and cash generation momentum ... Strategically, the focus shifts towards the portfolio development over the medium term,” it added.

“Its Asian (capex led) targeted organic growth initiatives appear to be gradually shifting the business focus away from its overweight European (and low growth) base. In addition, its strategy of refocusing the business back to the Verbund core suggests further divestments could be considered and would assist in funding its expansion plans.”

The bank concluded saying that recent transactions in the chemicals sector and the return of private equity would suggest it is a “good time to be a divestor” of assets.