EUR 850.00 For Business Accounts Only

Morningstar | BASF's 4Q Profits Down Sharply as Expected, but 2019 Outlook Encouraging; Shares Fairly Valued

Narrow-moat BASF reported fourth-quarter EBIT of EUR 630 million, a nearly 60% decline from the prior-year period due mostly to lower isocyanate prices. This was below our estimate but ahead of consensus which, combined with relatively positive 2019 guidance, sent the shares up 4% intraday. EBIT for the full year fell 17% from 2017, in line with the company’s December 2018 profit warning of a 15%-20% decline. BASF expects a slight increase in EBIT for 2019, which means up to 10% growth, although improvement is heavily weighted to the back half of the year, given an extremely tough comparable in the first half of the year, as that was when the isocyanate market hit its peak in 2018. We currently forecast 3% EBIT growth and don’t expect to make any material changes to our forecast or EUR 74 fair value estimate. At current levels, the shares look fairly valued.

Several sizeable one-off events in BASF’s 2018 results will make it difficult to gauge 2019 performance; also, the company has just rejigged its segment structure. Aiding 2019 comparables will be the recently acquired seeds business and normalization of the Rhine water levels. The seeds business generates almost all of its roughly EUR 500 million in EBIT in the first half of the year. As this business was consolidated in August 2018, last year’s contribution was mostly integration costs. The low water levels in the Rhine River were also a significant drag on 2018 results, leading to abnormal costs of around EUR 250 million. We don't expect these to repeat. On the other side, the monomers business will face a massively tough comparable due to the bonanza-style profits generated in 2018 from industry supply disruptions. At a high level, we think these effects roughly balance out.