BFFAF - Follow-Up Note On BASF Preliminary Figure

• Gas implication on BASF account.
• Despite the macroeconomic scenario and the energy impact, the company delivered strong results.
• Next catalyst at the end of July. Buy rating confirmed.

Here at Mare Evidence Lab, we always like BASF (BFFAF) and i t still is a top pick in our portfolio . Unfortunately, the stock price result was not in line with our expectations, but we were not discouraged and we averaged down BASF stock price. Yesterday, the German chemical giant released its preliminary figures for Q2. This mark represents a key turning point for the company.

Here below our key takeaway.

1. The company delivered a very good set of numbers beating consensus analyst expectations in almost every line in its P&L; the only division that was not supportive of BASF three months account was the nutrition and care (N&C)
2. Despite the N&C division, chemical spreads were supportive and robust. We are confident in the management's ability to increase prices over costs
3. Going back to point 2), these outstanding results were achieved despite the high energy prices recorded in Europe and higher raw material costs; in specific, top-line sales were up by more than 15% and this was also due to favorable FX development
4. Going down to the income statement, operating profit recorded €2.35 billion results compared to the €2.31 billion from last year
5. As we can see in the company's note, net income was considerably higher compared to the last year's one. This was due to Wintershall Dea's results. We accurately cover the topic , and according to the latest rumors, BASF is currently in talks to offload its Russian energy assets to LetterOne that currently already owns 33% (BASF equity stake is 67%)
6. At this time, we see that volume is slightly down compared to the previous year's results
7. More important to note is the fact that BASF has not changed its 2022 guidance. This could imply a possible deterioration starting from the second half of the year

The next catalyst is the full presentation that the company plans to report on the 27th of July.

What's our take?

Mare Evidence Lab's fiscal year operating profit forecast stands now at €7.85bn and it is almost 10% above BASF's guidance and more than 13% ahead of pre-results VARA consensus estimates. If the energy crisis will further deteriorate, our internal analysis suggests that BASF has the ability to switch grid electricity from natural gas allocation (for almost 2/3 of its production). If this was the case, there are also headwinds for the Methanol sales and Ammonia production. Gas rationalization and energy grid switch could materialize in a 6% higher cost, whereas EBITDA impact on ammonia and methanol production could mean another 10% deterioration all else being equal.

Looking at the past crisis, only four-time BASF had a dividend yield higher than 7% and we should also note that the current buyback is EPS accretive at the current stock price level. Being the chemical spread supportive and considering the energy risks impact, we lowered our target price from €70 per share to €66 but we reaffirm our buy target, reminding our readers that on an EV/EBITDA, BASF, versus its peers, is currently trading at a much higher discount compared to the past (20% versus 6.5%).

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