2023-07-18 12:30:51 ET
Summary
- German chemical giant BASF has released preliminary Q2 2023 financial figures, showing an adjusted core operating profit of €1 billion, down 57% sequentially and flat compared to 2019.
- The company has downgraded its yearly guidance. This was well expected.
- Despite the downturn, we remain positive due to anticipated better-than-expected cyclical earnings over the short-medium time horizon.
Last week, BASF released its preliminary Q2 2023 financial figures, and today, we are back to comment on the German chemical giant ([[BASFY]], [[BFFAF]]). Since our last update called " We See Light And Shadow In Q1 ", BASF stock price has been broadly flat (Fig 1). As a reminder, our buy rating is supported by the company's EBIT (almost 3/4 is non-related to EU countries), a lower gas price development (for European chemical players, gas is the most relevant cost item on the P&L), and a tasty dividend yield as downside protection. Here at the Lab, we also anticipated a €3 billion free cash flow deficit in 2023 with an increase of 0.3x net debt/EBITDA per year until 2025. This is due to higher CAPEX investment requirements, maintaining a flat dividend per share at €3.4 over the medium-term horizon. Comparing our forecast numbers with the latest BASF Capital Market Day release, we see the capex budget by type of investment per year (Fig 2), and we are in line with BASF's internal estimates (with peaks in 2024 and 2025).
Fig 1
Fig 2
In number, the company pre-announced an adjusted core operating profit of €1 billion. Looking at last year's H1 financial figure , BASF is sequentially down by 57% and flat compared to 2019. Despite that, this aligns with our recent guidance and Vara's consensus (with a minor discrepancy of only 1%). The Q2 top-line sales are now expected to be at €17.3 billion with a minus 25% on a yearly basis, given lower prices and volumes at -0.7% and -12.8%, respectively. We should also report a negative effect on currency development. The company noted earning weakness in the Chemicals and Materials division. The Q2 2023 numbers will be reported on July 28.
Last year, we also commented BASF Preliminary Figure; however, this time, the company lowered the yearly guidance, which is not surprising. For this reason, already in Q1, we decided to reduce our target price, still maintaining an overweight valuation.
Why are we still positive?
- The revised guidance implied an EBIT in the €4 and 4.4 billion range (from a previous number between €4.8 and 5.4 billion). At the midpoint, the new guide implies a 39% earnings decline. Considering the yearly results, this estimate assumes a seasonal decrease in the second half of the year with no recovery in demand. Therefore, this guidance is close to an earnings decline of 45% in H2; however, we anticipate better-than-expected cyclical earnings over the short-medium time horizon, given the client's destocking activities already seen in the chemical value chain;
- Looking at Vara consensus estimates, the new guidance midpoint is 14% below analysts' average outlook, so a very pessimistic scenario is already implied in BASF's current stock price. In addition, while the quantum of the downgrade was anticipated, it remains lower than sector peers such as Evokink and Lanxess, with a minus 24% and 31%, respectively;
- Looking at the yearly sales, 2023 turnover is now guided in the range of €73 and 76 billion (from a previous number between €84 and 87 billion). At the midpoint, the new guide implies a 13% sales decline. Management flagged a continued slowdown in global industrial production, but to support our volume recovery in point 1), it is worth highlighting that the company does not anticipate any further slowdown in demand;
- In the press release, there was no additional disclosure on which divisions' outlook has been revised downwards;
- BASF operates close to end clients, and the cost-cutting announcement is not very well priced in, and it is not playing any favor to the H2 forecasted numbers. As a reminder, the company announced a new €500 million saving plan;
- For now, we leave our CAPEX estimates unchanged, including a flat dividend per share (with no additional share buyback).
Conclusion and valuation
At the Lab, we have already lowered BASF's core operating profit. In detail, our 2023 and 2024 EBIT is down by 8% and 5% to €4.3 and €6.1 billion. EPS is down by 13.5% and 6% to €4.0 and €5.5. With this new guidance, we are still above the company's midpoint consensus range. Why? While Wall Street analysts debate the recovery timing date, we see the downgrade cycle as largely over. Looking ahead, we anticipate higher volumes with no more destocking and a positive pricing delta on cost. 2023 BASF's P/E is below its long-term multiple (11.5x vs 12.5x) with a price to book at 1.5x vs 3x. Looking ahead, BASF's 2024 P/E is at 6x (implying a low cycle multiple, while we are forecasting an earnings recovery story supported by an ongoing turnaround). With a dividend yield of almost 7.3%, we believe analyst cuts are more than priced in. Overall, we continue to see an upside in the coming twelve months. As already happened in 2022 with the Enel investment case , BASF's investor needs to be patient. Therefore, we reaffirmed our target price of €55 per share ($11.8 in ADR).
For further details see:
BASF: Preliminary Q2 Earnings In-Line, Buy Again