Morningstar | Weakening Isocyanates Markets Lead BASF's 3Q Profits Down
Narrow-moat BASF reported third-quarter EBIT of EUR 1.5 billion, down 14% over 2017 and slightly below consensus and our expectations. Shares are trading down modestly, in line with the group. The isocyanates market is rebalancing slightly faster than we expected, leading to a 23% decline in EBIT over the prior-year period in the chemicals segment. We had assumed material declines would commence in the fourth quarter. In any case, we still see a sizeable EBIT decline in 2019 for the chemicals segment, owing to lengthening supply-demand balances in isocyanates and cracker products. Performance in the downstream segments is tracking below our expectations. We expected price increases to have a more positive effect on performance in the second half, but they are being more than offset by fixed-cost inflation. However, some of the increasing costs can be attributed to low water levels in the Rhine river, which is increasing transportation costs temporarily. We will likely adjust our near-term estimates down slightly but don't expect to materially change our EUR 78 (USD 23) fair value estimate.In the third quarter, BASF completed the acquisition of parts of Bayer’s seeds business and signed the definitive joint-venture agreement with LetterOne to merge their respective oil and gas businesses. This results in the oil and gas segment dropping out of the consolidated numbers. Consequently, BASF has adjusted its 2018 guidance to retroactively exclude the oil and gas business. BASF now expects a slight decrease in EBIT in 2018 compared with a slight increase previously, including the oil and gas business. This is broadly in line with our expectations.
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.
BASF is a chemical company based in Germany. Co. conducts its operations through five reportable segments: Chemicals, which comprises the Petrochemicals, Monomers and Intermediates divisions; Performance Products, which consists of the Dispersions & Pigments, Care Chemicals, Nutrition & Health and Performance Chemicals divisions; Functional Materials & Solutions, which comprises the Catalysts, Construction Chemicals, Coatings and Performance Materials divisions; Agricultural Solutions, which comprises the Crop Protection division; and Oil & Gas, which is composed of the Oil & Gas division.
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