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 and consensus.
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 in cost cutting.
German chancellor, Dr Merkel, had invited all relevant ‘players’, which are directly and indirectly involved in this complex situation. Germany is valued as an ‘honest intermediary’ in this currently-failed country. But Germany has some interest in solving this issue, which are not related to the official ones (e.g. migration to Europe): business.
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!
This could have been the first finding after BASF’s recent Investors Day sharing light on the company’s mid- to long-term ambitions of Agricultural Solutions. The latter has been earmarked for above-market growth and higher profitability, helped by innovative products.
Having attended the Investors Day, we obtained some valuable insights and a better understanding of where the momentum is expected to come from: new products and the digital agro platform.
BASF sells the pigments business to DIC for a 1.15x sales multiple, which we see at the lower end of its valuation range.
BASF’s Q2 reporting, or better H2(?), provided further details after the release of the preliminary figures earlier this month, whereas the presentation was not as straightforward as previous ones. We appreciate the greater details (e.g. relevant triggers for the development). All in all, management confirmed our view.
BASF announced that the Q2 figures will be below expectations and lowered FY guidance accordingly. A one-off will cushion the weak operating performance in Q2, but it will not be cash relevant. The development in Chemicals and Materials has worsened and is even far below our already cautious expectations. It remains unclear to us why this was not better managed by the company as consensus still sees EBIT before one-offs at €1,470m (new guidance: ~€1.0bn) in Q2.
This development had been anticipated due to the higher available capacities and lower raw materials. Along the value chain, the lower demand from the automotive industry were a burden. All in all, the Q1 figures came in slightly stronger than expected, especially at the profitability level and beat consensus. However, Q2 looks like becoming more challenging than previously expected (larger maintenance turnarounds).
BASF’s Q4 figures were stronger than expected, especially Chemicals were a positive surprise (top-line and earnings) after Covestro’s weak Q4 figures. Agricultural Solutions were clearly below our expectation. Consensus was not met on the earnings level.
The good news is that one could have earned money at the early steps of the chemical value chain, and Functional Materials & Solutions looks to be on some kind of recovery.
BASF announced its new strategy under the aegis of the new CEO, Dr Brudermueller, which targets top-line growth above the market’s, an annual increase in EBITDA before special items of 3-5% and ROCE above the cost of capital percentage. By generating a higher FCF, the dividend will be annually increased. Furthermore, BASF aims to keep greenhouse gas (GHG) emissions flat at the 2018 level until 2030. As of 2019, there will be a new reporting structure. Currently, it is still unclear whether Construction Chemicals will be divested.
BASF was in a position to increase sales prices across the value chain, which was partly fostered by some tightness in several businesses or regions. Maintenance is a tool to manage capacities. The low water levels of the River Rhine had an additional negative impact. Among other factors, higher raw material prices at the early stages of the value chain put pressure on profitability.
The Q3 figures were above our expectations and did not fully match consensus on profitability levels.
There are various reasons to divest a business. Typically, a business earmarked for divestment generates poor margins (or is even loss-making), needs heavy investments for a strong market position, no longer fits into the (new) company’s strategy or …, but Wintershall has been a volatile but strong contributor to BASF’s profitability and its divestment disrupts the natural hedge. The company had already announced it will combine its exploration and production activities with DEA in a 67:33 joint venture.
BASF’s Q2 figures continued to benefit from a still strong (EBITDA margin: ~32%), but far less dynamic, Chemicals’ business and the recovery in oil prices (Brent: +48% yoy). The other divisions gave a mixed picture, but limited pricing power burdened profitability in the middle parts of the value chain (Performance Products was helped by a special situation). Figures broadly met our expectations, but consensus was not really met.
Party is not over, but we see the dynamics becoming far more moderate, as expected. Moving up the value chain, the divisions/segments are facing some challenges to protect their margins, especially Functional Materials & Solutions. NWC development indicates some clouds.
BASF’s figures were a notch stronger than expected, confirming our view on the company. Consensus was fully matched.
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Much has been written about the effects of the virus on the world and on the stock market. Here is one analyst’s take on some of the likely impacts on the way we should look at companies. This article was originally produced as a blog, “10 Changes Post Virus”, which was published a few weeks ago.
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In its trading update for the five months to the end of May, XP Power confirmed that it continues to see strong demand from semiconductor and healthcare customers. With demand from the healthcare sector likely to moderate in H2, and continued uncertainty in other end-markets, we maintain our revenue forecasts for FY20/21. We reduce FY20e EPS by 2.7% to reflect short-term increases in air freight costs.
Companies: XP Power
Today's AGM trading statement guides for 1H20 profit and cash generation to be at least as strong as 1H19. On-line market share gains and swift management action on cost supports a £7.2m EBIT for 1H20.
Fulcrum has reached an agreement with Harwood Capital and Bayford regarding the composition of the Board. Harwood has agreed to withdraw the proposed Tender Offer announced on 9th April 2020. The Company intends to appoint Jeremy Brade (Partner, Harwood) and Jonathan Turner (CEO, Bayford) to the Board as NEDs in short order following final due diligence. As a condition of their appointment to the Board on behalf of Harwood and Bayford respectively, the Company has entered into a relationship agreement with each of Harwood and Bayford in order to provide the Company with customary protections along with these Shareholders’ rights of Board representation. In addition, the Group intends to appoint two new independent NEDs prior to the 2021 AGM, with Philip Holder (Chairman) and Stephen Gutteridge (NED) stepping down upon their appointment. Lastly, the Company is proposing to amend the Articles of Association in order to incorporate additional protections typically available to UK public companies under the Code.
Companies: Fulcrum Utility Services
New Equity Driving Growth
Boku has made material progress in signing contracts to access data for its Identity business. Building from the three countries covered when the business was acquired at the start of 2019, Identity now has connections to mobile operators in 51 countries. This is a major step forward in the process of attracting multi-national customers to sign up for mobile identity verification services from Boku.
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
Companies: AEWU CREI CSH BOOT INL HLCL THRL SUPR RESI RGL DIGS GR1T SOHO PHP BOXE ASLI UTG AGR UAI BLND UANC CAL SHED CWD WHR EPIC WKP GRI YEW HMSO PCA INTU NRR
Strix has released an AGM statement indicating that trading in the early part of the year has been solid, the new financing facilities have been put in place, product development is on track with 14 new products released during the year and the factory move remains on schedule and to budget. The current trading period is an important one and the scheduled trading update 23rd July should provide more colour on the underlying performance as well as the early indications from the new products already released and the outlook for those that are scheduled to be released in H2. The resilience of the Strix business has been reaffirmed during the current situation with financial guidance having been maintained and the final dividend committed to, a 10% increase yoy.
Companies: Strix Group
Leading brick and concrete products manufacturer Forterra has issued a relatively positive update on trading, reporting a recovering trend in deliveries, albeit from low levels, as housebuilders and other construction groups have returned to site and “remains confident” that it can take advantage of the “long-term fundamentals” in its end markets.
Volution’s trading update reveals that activity was already 91% of last year in May for its businesses outside the UK. Revenues dropped further and are recovering more slowly in the UK, but the trend is encouraging. Volution has demonstrated the quality of its capex and working capital light model by generating cash across April and May.
Companies: Volution Group
De La Rue remains challenged. New management has to navigate a difficult Currency market and consequent concern over its finances. The swift response in terms of a turnaround programme is a positive start, accelerating cost cutting initiatives and cash management measures, including suspension of the dividend. Restoring stability and rebuilding confidence in the investment case is likely to take some time.
Companies: De La Rue
Anexo has placed 6 million new shares at a price of 125p to raise approximately £7.5 million before expenses. In addition, three senior members of the management team have sold 2.8 million shares at the same price. The placing and the team’s sales represent 5.5% and 2.55% respectively of the Group’s existing capital. The net proceeds from the primary placing will be used to expand the advocacy and specialist litigation team, headed by Executive Chairman, Alan Sellers, with specific emphasis on funding the acquisition and processing of VW emissions cases. It will also continue recruitment in the legal services business and increase the fleet size. The placing will also support small opportunistic acquisitions. A brief trading update reveals that, although new case numbers were impacted by fewer cars on the road in the early stages of lockdown (and have subsequently recovered steadily), this was mitigated by longer hire periods. Anexo continued to be cash generative in the first four months of 2020 and retains a positive outlook.
Entering the new fiscal period, the majority of Smart Machines units are operating as normal. The Smart Zones customer base has largely contracted to remain live and connected, albeit at a reduced unit rate. Vianet has received a business interruption loan and is adequately financed well into next year. By then it is anticipated that trading will have normalised. Our forecasts remain withdrawn for now.
Companies: Vianet Group
FY20 ended on a positive note strategically for Renewi, with two non-core disposals and resumption of soil shipments by ATM. COVID-19 began to have an impact at the year-end, but cost reduction/cash preservation measures together with amended banking covenants allow financial flexibility. A strategy refresh (Renewi 2.0) provides investors with a roadmap for future business development focusing on core business strengths. Our estimates are temporarily suspended and are under review.
FRP is a UK-focused business advisory firm, specialising in corporate restructuring (administrations, liquidations etc), with a nationwide network and team of c360. In its AIM IPO, FRP raised £80m gross (£20m new) at 80p on a pre-money market cap of £170m to fund organic plans.
Companies: FRP Advisory Group