EUR 850.00 For Business Accounts Only

Morningstar | BAS Updated Forecasts and Estimates from 21 Aug 2018

Narrow-moat BASF reported second-quarter results that were slightly below our expectations, owing primarily to lower margins in the downstream segments, as rising raw material costs could not be offset by higher prices. EBIT for the second quarter was EUR 2.4 billion, a 5% increase over the prior-year period. With continued soft results in the downstream business, our 2018 forecast for a 13% increase in EBIT looks aggressive compared with the 3% increase reported year-to-date and guidance for a “slight increase in sales and EBIT”. We still expect some improvement in the downstream business in the second half as price increases take effect, but we will likely tweak our near-term estimates downward. In any case, we don’t expect this to result in a material change to our EUR 78 (USD 23) fair value estimate. At current levels, the shares look fairly valued.

The functional materials and solutions segment continues to surprise us to the downside, as it seems to be most sensitive to the inflationary raw material environment. The EBIT margin declined 190 basis points to a paltry 6.1% in the quarter. This segment is particularly exposed to polyurethane inputs, which have seen some of the most dramatic price increases over recent quarters. However, we are now seeing some signs of price normalisation taking effect in this market. Consequently, we would expect some relief on the raw material side in the second half of 2018.

Unsurprisingly, the oil and gas segment was the biggest contributor to EBIT growth in the quarter, given significantly higher prices compared with the prior-year period. Second-quarter EBIT of EUR 391 million more than doubled over 2017 but was in line with our expectations. We don’t expect this segment to be a major driver of the stock, given that the pending joint venture with LetterOne will see the segment disappear into the abyss of the equity income line on the P&L. Closing is expected in the second half of 2018.

BASF management is participating at the Management Behind the Moat conference, which will be held at Morningstar’s Chicago office on Nov. 7-8, 2018. If you are interested in attending the conference, please reach out to your sales representative for registration information.