BFFAF - BASF: We Are Buying The Dip

• Q2 results in line with BASF's preliminary figures.
• New partnership with MAN Energy Solution to build the biggest heat pump in the world in order to reduce nat gas exposure.
• Despite the Nord Stream pipeline gas reduction, we confirm our buy rating with an attractive and safe dividend.

Following our comment on BASF's ( BFFAF ) preliminary figures released on the 11th of July, today the German chemical giant just released its full earnings disclosure . Last time, adjusting our internal model on the new company guidance, we lowered our buy rating from €70 to €66 per share, reiterating the following considerations :

1. Despite a challenging quarter and continuous pressure from raw materials and gas prices, BASF has confirmed its 2022 financial targets;
2. The company has a solid balance sheet and also the strong FCF generation provides support for the dividend payment;
3. We deep-dive into BASF's Russian exposure , and we valued 67% of Wintershall Dea at €4 per share in BASF's total sum-of-the-parts valuation;
4. We appreciated the company's ability to pass through costs with higher selling prices. We suggest our readers check up on Dow's latest publication ( Q2 results and our initiation of coverage ).

Q2 Results

Looking at the Q2 performance and having already analyzed the preliminary figures, there are no major surprises to report. BASF turnover increased by 16% to €23 billion in a year-on-year comparison. The final quarterly figures showed that the adjusted operating profit came at €2.34 billion and was only slightly below the profit of €2.36 billion recorded in the same period last year. This good result was achieved thanks to Wintershall Dea's performance. What is not coming as a surprise is the fact that BASF is raising its full-year forecast in this persistently difficult market environment. This is really remarkable, the company now expects a gradual slowdown in global economic development but at the same time, they raised the lower end of the operating profit forecast. They are now targeting at least €6.8 billion for 2022 instead of the previous €6.6 billion guidance.

Conclusion and Valuation

Thanks to our latest Uniper update , we provide a view on the European energy crisis and we also highlight that chemical companies account for almost 14% of the German gas consumption. However, the Ludwigshafen-based chemical group has the possibility to switch energy input from natural gas allocation to electricity for almost 2/3 of its entire production. If this is the case, based on our sensitivity model, we estimated a 6% higher cost. Very important to report and in line with our analysis is the new partnership signed with MAN Energy Solution. Thus, BASF will build the world's largest heat pump in the Ludwigshafen facility. We are forecasting lower results in the second half of the year, but we are still ahead of the consensus estimates guidance. Thanks to a strong margin of safety provided by the current dividend yield (higher than 7%) and a P/E ratio very much discounted versus its peers that are facing the same energy crisis, we confirm our valuation at €66 per share.

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