Surface Technologies’ ugly skid marks

BASF’s Q1 has two main points worth a closer look after the preliminary release. Surface Technologies and the effect for Dea of the impairment on its Russian-related operations. The former was somewhat unexpected in terms of its the magnitude and the latter was more moderate than had been anticipated. Looking forward, BASF is closely monitoring developments regarding any gas limitations, which would negatively impact production, especially at the Ludwigshafen site. Guidance maintained.

A moderate guidance against the background of a war

It remains to be seen, how the war in Ukraine directly or indirectly impacts BASF’s global business. The company has combined sales of <€1bn in these countries. On the other hand, there is a sizeable orderbook, which made management positive for H1 and there is hope in the pick-up in demand from automotive. The miss to our profitability expectations (-1.4%; consensus: -0.6%) came mainly from the steep price increases in December, which can not be passed on fast enough.

Skyrocketing prices meet good volumes

Once again BASF is a perfect proxy for volume and pricing development along the value chain. The strong Q3 development has forced the company to raise its guidance again, which looks quite cautious to us. Consensus was beaten by +10% at the top line and by +2% at the EBITDA level, which could be explained by increasing raw material prices along the value chain and higher logistics costs.

Unhinged business

With the release in hand, it became even clearer that the typical stops and starts had paused. In our long career, we have never seen such quarterly volume and price growth, whereas the drop was not that clear in Q2 20. In other words, BASF took full advantage. Despite the lifted guidance, a crucial question will be how long this period of satiation might last? Currently, it looks for a while. The spread of the Delta variant might stand against it.

Pricing party at commodities

BASF beat our as well as street expectations by +11% at the top line, but less at the profitability level (EBIT: +3%). The recovery story continued with an extra push from China. Here to the effects from extreme weather events and other unpleasant ones (the pandemic) limited availability as exchanges between regions remained somewhat constrained. BASF’s pricing power could be seen in the rise of the profitability lines of the divisions in the early steps of the value chain.

Quite cautious into 2021

BASF’s FY were finally stronger at the profitability level than expected by us after the release of some preliminary figures at the end of January. Despite more details, the stronger net working capital outflow seems to foil management’s quite cautious FY guidance. The start into the year might have not been a perfect one due to the weather conditions in some regions (e.g. US).

Beating expectations

Santa Claus seems to be dressed in BASF’s colours and bringing strong end-of-year ‘presents’. The earlier steps of the chemicals’ value chain came in above consensus expectations in Q4. This end-year push lifted profitability above the previous quarter’s level, which brought FY EBIT before one-offs closer to FY 2019’s, but above our own guidance. The reported preliminary figures were above our more cautious expectations and above consensus.

Preparing for reconstruction?

BASF’s official wording for the justification of the impairments taken in Q3 is that they expect continued oversupply of basic chemicals and weaker demand from certain end-customer industries. We find the idea of preparing the company for a BASF 2.0 quite compelling. Nevertheless, Martin Brudermueller still has a long way to go as impairments could be only be a signal. The management could see the pandemic as an opportunity for a fundamental shift.

Some acquisitions do not fly

Unlike Bayer, BASF’s agro-related impairment was not triggered by a write-down on the purchase price, only on the adoption of the production network. We believe the individual share for Surface Technologies, due to former Chemetall, and Chemicals as well Materials (no split provided) will be higher. We take the impairment as a kind of tidying up as the company ‘sells’ as a consequence of the pandemic’s weaker expectation in automotive and aerospace.

A mixed set of drivers

One can look at BASF’s figures and see what is going on in the (large volumes) chemicals industry. The drivers at the group level guide to lower volumes, but prices seem to be stable. Looking into divisional performances, the picture becomes less clear as the drivers of early steps (volumes: up; prices: down) of the value chain look different to those of later ones (volumes: down; prices: doing OK). There were no material changes to the preliminary figures.

Impaired Wintershall Dea

BASF’s preliminary Q2 figures were characterised by a slightly better than expected operating and earnings performance before one-offs, but were hit by the negative effect from the impairment in the oil & gas business. The latter submerged the preliminary profitability figures to below our expectations. Consensus was also not meet on net earnings.

Already applied for a banking licence?

It looks to us as if BASF plans to change its business model as the company has financed, or plans to do so, some of its stakeholders: shareholders, customers and clients. NWC outflows significantly went up and the plans to cash out ~€3bn as a dividend remain in place. Against the background of the still spreading COVID-19 pandemic and the realistic cancellation of FY 2020 guidance, management’s decisions are puzzling to us. The Q1 figures were better than expected, beating our expectations an

Pattern of figures as expected

BASF’s reported figures showed the expected pattern, despite having beaten our quite cautious estimates, whereas consensus was broadly met. However, management manoeuvred the company through a difficult year quite well and was able to deliver its announced portfolio targets. But BASF sees future challenges ahead. Against the backdrop of the looming virus pandemic, management gave quite a cautious guidance but assuming no global spread of Coronavirus. Furthermore, it plans to be more aggressive i

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Strong performance in the later steps of the value chain

Having food and feed broadly in common, Agricultural Solutions and Nutrition & Care gave BASF’s Q3 figures a nice push above our expectations and consensus, clearly supported by Surface Technologies. Interestingly, the strong volume decline in the early steps was fully compensated by the higher demand in the later steps – for the first time!

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