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Morningstar | BASF Issues Profit Warning on Falling MDI and TDI Prices; Trimming FVE to EUR 74. See Updated Analyst Note from 10 Dec 2018

After European markets closed Dec. 7, BASF announced it was lowering 2018 guidance due mainly to weakening isocyanate markets, specifically falling prices for methylenediphenyl diisocyanate and toluene diisocyanate prices. The ADR price fell 6.5% in response. BASF now expects 2018 EBIT to fall 15%-20% over 2017 compared with previous guidance for a slight decline up to 10%. We were forecasting a 10% decline. In addition to weakening isocyanate markets, BASF cited lower cracker margins, increasing costs from the low water levels in the Rhine River, and a declining automotive market, particularly in China, as contributing factors to the profit warning. After revising our forecasts, we are trimming our fair value estimate to EUR 74 ($21) from EUR 78 ($23). At current levels, the shares look undervalued.

We have written extensively about normalization in MDI and TDI markets, so this profit warning is not entirely surprising. After overearning for nearly two years, the MDI and TDI markets are now quickly rebalancing. Lower cracker margins have also been in the public domain for some time; we don’t expect a quick recovery in those products due to industry overcapacity in the United States. We are lowering our fair value estimate primarily in response to the costs associated with the Rhine River, which will reach EUR 200 million in the fourth quarter, and the automotive market, where deterioration appears to be picking up speed. While low water levels in the Rhine are likely to recover this quarter, uncertainty is increasing in the automotive market due to the U.S.-China trade war.

This profit warning follows a similar announcement by major MDI/TDI producer Covestro. Investors looking for the next shoe to drop should monitor Huntsman. With more than 60% of its revenue coming from MDI, we think it’s likely that Huntsman will announce a profit warning and/or weak guidance for 2019 in the coming weeks.

For details on our outlook for the MDI and TDI markets, please see "Covestro Has More Room to Fall," published Nov. 16.